IJCM Vol 3 No 2

Cover & spine 13/12/07 13:28 Page 1 ISSN 1741–4814 THE INTERNATIONAL JOURNAL OF THE CO-OPERATIVE MANAGEMENT INT...

0 downloads 212 Views 2MB Size
Cover & spine

13/12/07

13:28

Page 1

ISSN 1741–4814 THE

INTERNATIONAL JOURNAL

OF

THE

CO-OPERATIVE MANAGEMENT

INTERNATIONAL JOURNAL

VOLUME 3

NUMBER 2

NOVEMBER 2007

OF

CO -OPERATIVE MANAGEMENT 3

THIS ISSUE:

N O V E M B E R 2007

50 Tower Street • Leicester • LE1 6WT • UK

T HE C O - OPERATIVE D IFFERENCE M ORAL AND E THICAL P ERSPECTIVES ON L EADERSHIP M ANAGING M EMBER H ETEROGENEITY IN A GRICULTURAL C O - OPERATIVES D YNAMICS AND T ENSIONS IN C O - OPERATIVE G OVERNANCE S OCIAL R ESPONSIBILITY IN C O - OPERATIVES C REDIT AND C O - OPERATIVE D EVELOPMENT IN R URAL I RAQ . A HISTORICAL C REDIT U NION S UPERVISION C O - OPERATIVE B ANKING IN I NDIA E XECUTIVE O PINION , F IELD R ESEARCH AND B OOK R EVIEWS

NUMBER 2

Developing themes: Strategy, competitive advantage, co-operation between co-operatives, managing change, IT, networking, managing key stakeholder relationships, globalisation, governance, developing co-operative managers, managing and developing people, managing media, marketing, finance, logistics, quality, values.

VOLUME

Future Issues: Special guest paper Other refereed papers Executive interviews and reports Best practise Case studies Research abstracts Book reviews Law reports

P

U

B

L

I

S

H

E

D

B

Y

I

N

A

S S O C I A T I O N

ANALYSIS

w

I T H

Cover & spine

13/12/07

13:28

Page 2

International Journal of Co-operative Management Editor Dr Peter Davis, Director, Unit for Membership Based Organisations, School of Management, University of Leicester Associate Editor Dr Giorgos Alexopoulos, Department of Agricultural Economics, Agricultural University of Athens Commissioning Editor Robby Tulus, Consultant Editorial Consultant John Donaldson, Foundation Member, New Harmony Press Ltd Editorial Advisory Board Sister Helen Alford, O.P. Angelicum Dr Michael Bourlakis, Senior Lecturer, Brunel University Prof. Suleman Chambo, Principal, Moshi, University College of Co-operative and Business Studies Prof. Elba Echevarría Díaz, MPA, Cateddrática Auxiliar, Instituto de Co-operativismo, Facultad d Ciencias Sociales, Universidad de Puerto Rico. Mr Barry Epstein, Credit Union Training and Education Prof. Klaus P. Fischer, Departement de Finance et Assurance, Université Laval Mr John Harvey, Chief Executive, Co-op Atlantic, Canada Dr Mohd. Taib B. Hashim, Director, Co-operative College of Malaysia Dr Tapani Köppä, Mikkeli Institute for Rural Research, University of Helsinki Mr Akiria Kurimoto, Acting Director, Consumer Co-operative Institute of Japan Mr Mario Mazzoleni, MBA Director, Masters Division, dell’ Universitá Bocconi Prof Ian McPherson, University of Victoria, Canada Dr. Nasser Mirepassi, Islamic Azad University Prof. Thoby Mutis, Indonesia Prof. Samuel M. Natale, Professor of Management, Adelphi University, New York Prof. Costas Papageorgiou, Dept of Agricultural Economics, Agricultural University of Athens Dr Yehudah Paz, Chairperson Negev Institute for Strategies of Peace and Development, Israel Prof. Sigismundo Bialoskorski Neto, Department of Economics, University of Sao Paulo Dr Panayiotis Kaldis, Dept of Agricultural Economics, Agricultural University, Athens Mr Ghislain Paradis, Chief Executive, Developpement International Desjardins, Canada Dr K. Ramesha, National Institute of Bank Management, India Mr Ian Snaith, Department of Law, University of Leicester Prof. Steve Worthington, Department of Marketing, Monash University Madam HJH Armi Zainudin, General Manager, Koperasi JCP Merchantile, Kuala Lumpur, Malaysia. Former Director of the Co-operative College of Malaysia Address for correspondence (for submission of manuscripts, see inside back cover) Dr Peter Davis, Unit for Membership Based Organisations, School of Management, Ken Edwards Building, University of Leicester, University Road, Leicester, LE1 7RH. United Kingdom. Designed by AVS – Graphics, Printed by AVS – Print. © New Harmony Press Ltd 2007 ISSN 1741-4814

CONTENTS

INTERNATIONAL JOURNAL OF CO-OPERATIVE MANAGEMENT Volume 3

Number 2

November 2007

Contents Notes on Contributors ....................................................................................................................................................04 Editorial ..........................................................................................................................................................................06 Special Guest Paper: The Co-operative Difference: economic, organizational and policy issues Andrea Bernardi ............................................................................................................................................................11 Other Refereed Papers: Leadership: a moral and ethical perspective Samuel M. Natale, Anthony F. Libertella, Brian M. Rothschild and Sebastian A. Sora ..........................................23 Dynamics and Tensions in Governace: evidence from Finnish co-operatives Iiro Jussila, Juha-Matti Saksa and Janne Tienari ......................................................................................................29 How to deal with member heterogeneity – management implications Jon H. Hanf and Erik Scweickert ..................................................................................................................................40 Social Responsibility in S Group Co-operatives: a qualitative analysis of archival data Terhi Uski, IIiro Jussila, Susa Kovanen ........................................................................................................................49 An alternative approach to oversight: the case of the supervisory committee in Irish credit unions Noreen Byrne, Olive McCarthy and Michael Ward ....................................................................................................58 The Credit Problem in Rural Iraq: the Baathist state-owned agricultural bank's financing of Land Reform Co-operatives Al Rashid ..........................................................................................................................................................................68 Prudential Norms and Performance: research issues in co-operative banking in India K Ramesha ......................................................................................................................................................................79 Executive Opinion: Time for a new addition to the consumer co-operative movement Edgar Parnell ..................................................................................................................................................................85 Risk and Reward: Assessing stakeholder risk in a member-based organization Roy Allen ..........................................................................................................................................................................87 Field Research: The Credit Co-operative Movement in Myanmar: an application of the “thrift and credit co-operative evaluation methodology”. Gus Poston ........................................................................................................................................................................92 Book Reviews ................................................................................................................................................................102 Notes for New Contributors ......................................................................................................................................109 Future Topics ....................................................................................................................................................................109

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

3

NOTES ON THE CONTRIBUTORS

Notes on the Contributors Roy Allen Social and Business Entrepreneur Founder New Path Academy Rochester, NY USA June 25, 2006 [email protected] Andrea Bernardi, Researcher in organisation theory at Rome University III Univerita and the founder of a workshop for co-operative studies in the Department of Economics. Roma Tre - Università degli Studi di Roma Dipartimento di Ricerche Aziendali Via Silvio D'Amico 77 00145 Roma Italia [email protected] Noreen Byrne Researcher, Centre for Co-operative Studies, Lecturer, Department of Food Business & Development, University College Cork [email protected] Jon H. Hanf, PhD, Post-Doc Researcher Leibniz Institute for Agricultural Development in Central and Eastern Europe (IAMO), TheodorLieser-Str. 2, 06120 Halle (Saale), Germany [email protected]

Anthony F. Libertella, JD, Ph.D. Dean, School of Business Adelphi University Garden City, NY 11530 [email protected] Olive McCarthy, PhD Researcher, Centre for Co-operative Studies Lecturer, Department of Food Business & Development, University College Cork [email protected] Samuel M. Natale, D. Phil. (Oxon) Professor of Management Adelphi University Garden City, NY 11530 [email protected] Edgar Parnell Author, Consultant, and Co-operative Development Specialist 11 Parkland Place, Wren Way, Bicester, Oxfordshire, OX26 6UH Home Phone: 01869 327205 Email: [email protected] Website: www.consumerjustice.org.uk

Iiro Jussila, M. Sc. (Econ & Bus. Adm.) Project Manager Co-operative Business Managent Research Unit, Department of Business Administration, Lappeenranta University of Technology, PO Box 20, FI-53851 Lappeenranta, Finland. Tel +358 5 62 111 [email protected]

Angus (Gus) Poston Gus Poston is an independent strategy and management consultant, specialist in developing countries. 8/30, Sukhumvit Soi 8 Bangkok 10110, Thailand Tel: +66 81 343 2947, +44 7815 137438 e-mail: [email protected] Web-site: www.newthinking.org.uk

Susa Kovanen Researcher in Management and Organizations, Department of Business Administration, Lappeenranta University of Technology, PO Box 20, FI-53851 Lappeenranta, Finland. Tel +358 5 62 111 [email protected]

K Ramesha, PhD Associate Professor National Institute of Bank Management Kondhwa Khurd, NIBM Post Office Pune 411 048, India Telefax: 0091 20 26833080 [email protected] http://nibmindia.org

4

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

NOTES ON THE CONTRIBUTORS

Al Rashid, Associate Professor of Economics Dean College, Franklin, Massachusetts, Brian Rothschild, MBA Assistant Dean, School of Business Adelphi University Garden City, NY 11530 Juha-Matti Saksa, M. Sc. (Econ & Bus. Adm.) Researcher in Management and Organizations, Department of Business Administration, Lappeenranta University of Technology, PO Box 20, FI-53851 Lappeenranta, Finland. Tel +358 5 62 111 [email protected] Erik Schweickert, PhD, CEO KIRBIS – SAP Solutions for the Wine- and AgriBusiness, Streiflingsweg 4, 75223 Niefern-Öschelbronn, Germany [email protected] Sebastian A. Sora, PhD is Associate Professor of Management and Information Systems at Adelphi University, School of Business in Long Island, New York. Seb is also currently a consultant to IBM. His primary interests are the use of information systems within the context of globalisation and ethics.

Janne Tienari, D.Sc. (Econ.) Department of Business Administration, Lappeenranta University of Technology, PO Box 20, FIN-53851 Lappeenranta, Finland. Tel +385 50 3531093 [email protected] Pasi Tuominen, M. Sc. (Econ & Bus. Adm). Researcher of Management and Organizations, Department of Business Administration, Lappeenranta University of Technology, PO Box 20, FI-53851 Lappeenranta, Finland. Tel +358 5 62 111 [email protected] Michael Ward, PhD Director Centre for Co-operative Studies, Acting Head of the Department, Department of Food Business & Development, University College Cork [email protected] Terhi Uski, M.Sc. (Econ. & Bus. Adm) Researcher Lappeenranta University of Technology, PO Box 20, FIN-53851 Lappeenranta, Finland. Tel +358 5 621 7243 [email protected]

NOTICE International Journal for Co-operative Management is available on the Web. Go to www.newharmonypress.com and press on the International Journal of Co-operative Management button on the home page for current and back issues of the journal. Subscribers will still get hard copies sent through the post as at present. Non-subscribers may request papers or whole back issues from the Editor for which a charge will be made. On-line Journal Access Codes required:- contact the Editor.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

5

EDITORIAL

Editorial We commence this issue with a wide ranging paper concerned to explore the continuing relevance of the co-operative difference in the context of globalisation. In our Special Guest Paper section Andrea Bernardi reviews the contemporary debate on the role of cooperatives in the global economy from an Italian perspective but with insights that have certainly a far wider relevance. His conclusion that the market rather than institutional forces should determine the extent of co-operative activity is certainly in tune with the liberalised economic environment which is offering so few regulatory constraints on the co-operatives private sector competitors. Co-operative need to grow and as they grow they may need to buy and operate subsidiaries and Andrea Bernardi insists can do so using the latest management methodologies without any loss of their most important competitive weapon namely, what it is that differentiates them from their private sector competitors. We are delighted to welcome back Iiro Jussila, and Juha-Matti Sakasa and, for the first time, their new co-author Janne Tienari who have conducted a very important piece of research into the issues of cooperative governance. Their paper suggests a new direction for research on co-operative governance examining the impact of the psychological dimension of peoples’ sense of ownership, the significant differences in this sense of ownership at different levels, and its significance for explaining tensions between actors at local and regional/national cooperative structures. The small Finnish population and strongly defined regional identities may limit the general applicability of this research in more urban mass culture societies. Notwithstanding this possibility I recognised very similar past responses by boards and members in the UK local consumer cooperatives resistance to merger as is identified in this interesting Finish research. Of course market realities in the end forced the mergers through, rather too late in the UK case to stop the dramatic loss in market share. Their paper considers critically the wide range of approaches to governance and their comparison and contrasting of the different emphasis in approaches and in the discussion rooted in their consideration of different ownership models provides us with an important refection which I am sure will rightly stimulate further research and hopefully some development of management practices in the areas of membership and governance. 6

One new approach to governance in the modern context that the authors did not consider was the proposition that modern management methodologies, particularly TQM, provide in the co-operative context a mechanism for governance. (See: Davis, P., Managing the Co-operative Difference, ILO Cooperative Branch, Geneva, 1999) I suggested that modern management methods are in fact more effective in the co-operative business model because they can act as a governance mechanism. Total Quality Management (TQM) as applied in the private sector, where stakeholder tensions and conflicts are much more clearly defined and hard to resolve, is much more problematic. In this Finnish study the overlap of stakeholders through both “ownership and customership” supports this contention. TQM in the co-operative context is I suggested particularly suited to mobilising opinion of “passive” members and overcoming diluted or unrepresentative democratic processes in the case of national and large regional cooperatives. My case study to illustrate the point was the UK Co-operative Bank plc as it developed in 1980s and 1990s under the leadership of Terry Thomas. Of course such an application requires a CEO like that of Terry Thomas who is committed to and has an understanding of co-operative values and purpose. Here the issue is a lack of management development and dedicated recruitment and selection agencies to support co-operatives to employ managers with the right values as well as the right technical expertise. This is sadly lacking in just about all countries. These HRM issues rarely come into the debate on governance. To the extent that governance is about how individuals in positions of trust and leadership behave the omission is particularly unhelpful. The issue of character formation in determining moral behaviour in general and leadership behaviour in particular is a fascinating subject. In their paper exploring leadership from its moral and ethical dimension Natale, Libertella, Rothschild and Sora argues forcibly for a greater engagement with the character formation informing the leaders’ moral compass. The authors of this paper recognise character formation goes back to ones earliest socialisation in family and schooling. The literature they draw on however rejects the idea of character formation as something fixed for life from relatively early on in ones development. They quote George (2006) and others to the effect that the characters

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

EDITORIAL

moral compass is developed over a lifetime. From the co-operative standpoint this topic has a pressing relevance given the often weak governance content found in even the most committed participatory systems in co-operatives. As co-operatives grow so member control weakens and managerial control strengthens. Boards need to be able to identify the right character profiles for their management executives to help to ensure the leadership provided by professional management is on mission in terms of co-operative values and purpose. The fate of the Canadian Wheat Pool and the current debacle in the de-mutualised Northern Rock bank (former building society) in the UK are among many examples of demutualisation across the world led from the inside by top management. These cases demonstrate how important the moral compass and value commitment of co-operative management is. Natal, Libertella, Rothschild and Sora concludes there are a variety of definitions and development approaches which seek to address the character and ethical development of leaders today. Their paper reviews this literature comprehensively but recognises that so far research is far from conclusive as to what is possible or desirable in a variety of different organisational contexts and they call for further research to be undertaken. In the paper by Hanf and Schweikert we have in their case study of product segmentation strategies in the German wine Co-operative sector another illustration of the important leadership role managers of co-operatives play in practice. In this case to ensure their co-operative not only responds effectively to changing market conditions but also is defended against behaviour by some members that might undermine the economic effectiveness of the cooperative itself. It is surprising to find in Germany laws that require food co-operatives to take any standard of produce. This seems to be contrary to the very high standards of health and quality one has come to expect from German produced food and drink. I know of no co-operative principle that says members can join yet ignore the standards or rules of their cooperative? Open Membership and Voluntary Membership principles yes I have heard of these, but not Anarchic Membership! Indeed it was the late Will. Watkins who, rightly in my view, stated that for a cooperative unity was more important than democracy. (Co-operative Values Today and Tomorrow, Holyoake Press, Manchester, 1990, p19) Agricultural Co-

operatives are, as the German case study indicates, merging and regrouping in order to retain the necessary leverage on behalf of the small farmer. Nobody wants to see a European countryside like that of the prairies. Whilst producers co-operatives must respond to the growing power of supermarkets in terms of quality in order not to loose overall market share they also must try to ensure that they defend the rich variety of local wines and other products by developing their relationships and promotional activities with the small specialist wine merchants and by direct marketing through wine clubs etc. of their members low volume but high quality local wines. It is not a question of either or but of getting the balance right in financial terms and in marketing terms, connecting products, price, and place and services to the appropriate customer segment. Education is another important Co-operative principle that can be an important marketing tool today enabling producer co-operatives to reach out to the end consumer and develop their market. Co-operatives particularly those engaged in food and wine production need to be as concerned with consumer education as member education; on the one hand in terms of trade justice, health and sustainability and on the other in terms of encouraging the end consumer to experience the rich variety of good things to eat and drink that nature and labour can produce. In another Finnish contribution, Terhi Uski, IIiro Jussila, and Susa Kovanen present their research into Corporate Social Responsibility (CSR) as practised in the Finnish S co-operative case study. Their research seems to bear out the versatility as well as the strategic importance of the co-operative principle of education. Their qualitative analysis suggests that social responsibility as put into action by Finnish S cooperative fulfilled co-operative values and emphasized regional responsibility demonstrating the importance of customer-owner relations and taking care of the continuity of co-operative business embedded in its regional and / or other community context. The theme of governance re-emerges in the paper by Norah Bryrn, Olive McCathy and Michael Ward. They suggest that there are lessons in the credit union supervisory committee model as a governance tool that could be applied more generally to audit committees throughout the financial services sector and beyond. The paper has some very interesting data

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

7

EDITORIAL

CO-OPERATIVE GROUP TO SELL SHOEFAYRE The Co-operative Group has today (10 September) announced that it has exchanged contracts with Shoe Zone which is set to buy the Group’s retail footwear business, Shoefayre for an undisclosed sum. Shoefayre, a Leicester-based business, which has annual sales of £65 million, operates 240 high street outlets across the UK, offering a wide range of value footwear. A spokesman for the Co-operative Group explained: “We have taken this decision after very careful consideration of the options open to us, having supported the business through an extensive change programme over the last 18 months. “The UK footwear market is highly competitive and further consolidation among retailers is inevitable. It’s a specialist area, which is not a core activity for the Group and we would need to make considerable further investment in Shoefayre over a long period of time with uncertain prospects of putting the business back on a sound financial footing. “In the circumstances, sale of the business to a well-known and profitable footwear retailer is both logical and desirable.” The Group took full control of Shoefayre in 2005, having previously been one of a number of Co-operative shareholders in the business. It subsequently launched a business turn around programme, which has made considerable progress in reducing costs and improving the customer offer. The sale is expected to be completed in the next few weeks. Shoefayre employs 1900 people, more than 1300 of whom are part-time. Ends Notes to Editors: On 29 July 2007, The Co-operative Group and United Co-operatives merged. The new society is the world’s largest consumer co-operative with a turnover of more than £9 billion, 4 million members and 87,500 employees. The society’s major businesses include food, financial services, funerals, pharmacy and travel, together with property, farming, consumer legal services and motor dealerships. In addition, the society operates the on-line electrical and bed retailer, E-stores. The new organisation operates over 4,500 trading outlets throughout the UK, including food stores, pharmacies, travel branches and funeral homes, which will adopt the uniformed brand - The Co-operative.

8

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

EDITORIAL

on the composition of Irish credit union supervisory committees cross-referenced to their proactive engagement with the main board. I wonder whether this research does not carry the seeds for a further look at composition of boards related to incidents of innovation, social venturing or entrepreneurship within co-operatives? Al Rashid has given us an interesting business history covering the difficult period leading up to the current situation in Iraq. It deals with issues of incorporation of the co-operative movement by the state and the states ability to use its financial leverage to manipulate cooperatives for its own political agenda. On the question of political interference and the negative impact of top down control of co-operatives by government we have some hard hitting commentary by Dr Krishna Ramesha. His focus is on the impact of Co-operative Banking reform in India and its’ likely influence on the Indian Co-operative Banks. He draws our attention to the urgent need for more research on the impact of general financial services regulation on co-operative financial services. This is of course is a global problem and we hope to carry more examples and discussion on this from both Co-operative Banking and Credit Union perspectives in future issues. Under our Executive Opinion features Roy Allen presents an interesting paper concerning the application of the risk assessment literature to the cooperative sector. Roy insists that a conscious application of risk management principles to membership based organisations will strengthen their defensive position and enable them to improve their recruitment, development and retention of stakeholders in general. This whole topic of risk management in the co-operative context merits further discussion and debate and we are delighted that Roy has taken time to open this discussion up in our pages. At one level the whole co-operative project may be seen as an exercise in social risk management. If the movement does take on board the principles that it chooses to publicly differentiate itself by (ICA Statement of Co-operative Identity) then the level and complexity of the risks cooperatives need to manage rises accordingly and need to be reflected on and managed. In the paper by Edgar Parnell we have not so much an executive opinion as an executive action with Edgars’ establishment of a new Consumer Justice Cooperative. Globalisation has increased the distance between the various stages in the supply chain as well as increased the relative size and complexity of the organisations occupying those various stages. The

consumer has very little support in such an unequal contest of individual versus corporation. The market and competitive pressures may help to keep big organisations responsive to their customers and their image according to the economics textbooks and corporate public relations departments. The reality of oligopoly may mean that in many cases customers have little choice in practice and that once a decision to purchase has been made the customer ability to get redress can be limited. Edgars initiative may well be something that the consumer co-operative movement might at first see as a rival or implied criticism of its own effectiveness. But I believe a more considered reflection will show that Edgars’ idea is right. An independent non- retailing body is the only one that can be said to deal impartially with genuine consumer concerns. As such genuine retailers and other service providers should welcome and support Edgars Consumer Justice Co-operative as a timely move to counter unethical traders. I am grateful to Gus Poston for his excellent write up of his field research in terms of the methodology as well as the strategic management context. I hope we can carry more reports of field work in development goals and strategy and how such activities are being managed in future issues. Finally I wish to draw readers attention to the sale of the UK Co-operative Shoe chain Shoefayre and call for papers on this and other co-operative sell-offs from academics, senior managers and co-operative directors primarily in the Co-operative Movement in Britain. Overseas commentary on the British movement would also be welcome. I would like the authors of these papers to respond to the following press release, which I reproduce in full opposite as it was sent to me by the Co-operatives Group PR Department following my request for a copy. This is the latest in a long and sad line of sales of major brands by the UK Co-operative Group from the demise of food manufacturing through to the more recent sale of its’ opticians business. It is particularly unfortunate for the consumer of shoes in the UK as shoe retailing is such a highly concentrated market and as such the cooperative presence was all the more important to provide real choice. In funeral services the industry is now a virtual duopoly between the Co-op and a US Multinational. A successful consumer co-operative movement in Britain is clearly therefore in the public interest if we believe the economics rhetoric on the importance of real competition. Am I alone in thinking that this is yet another illustration that the British consumer co-operative

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

9

EDITORIAL

movements’ management are unable to expand and develop its retail business? Is the rationale that the movement needs to raise capital? If so what is the purpose? Given that we are about to embark on giving capital away in a new member dividend scheme being short of capital cannot be the answer so we fall back on the explanation that our management are not able to run the retail shoe business successfully. Another explanation might be that they are going to invest members’ capital in a more beneficial way? If so what are the new business ventures and or services to members that are being delivered with the undisclosed sum? Who brokered this deal? After the scandals of recent years are not members entitled to total transparency concerning a sell off of this nature? Academic papers and executive opinions to the editor please. Peter Davis December 2007

Mission of the Journal • To act as a medium for the dissemination of best management practise in the co-operative movement • To act as a medium for the publication and dissemination of research into the management of co-operatives • To act as a platform for informed debate within the co-operative sector on issues and problems arising from the management of co-operatives • To act as a vehicle for promoting the professional development and status of managers in the co-operative sector across the management profession as a whole. • To act as a medium for the discussion and dissemination of the latest thinking in all areas of management that may have a relevance to the practise of management in the co-operative sector.

10

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

SPECIAL GUEST PAPER

The Co-operative Difference: economic, organizational and policy issues Andrea Bernardi

Abstract The paper poses the question what is different about co-operatives and is co-operative action still relevant today? Why should policymakers pursue it in development strategies? In what way are co-operatives different in terms of economic theory and organisation theory? And if there are differences in organisation, human resource management practices, property rights and forms of collective action, what are the governance issues to be addressed so as to allow cooperatives to operate and grow correctly? The article proposes a reflection both on research opportunities and on the management challenges of co-operatives with particular emphasis on co-operative relationships and organizational lifecycle issues.

Key words Co-operatives, Collective action, Lifecycle

Introduction This paper was written against the background of animated discussion in Italy on the role of cooperation. A large, traditional insurance company controlled by numerous co-operative firms attempted a stock-market takeover of a major Italian bank with the aim of creating a co-operative banking and insurance corporation. The takeover bid failed because of opposition on the part of Italy’s central bank and scandals involving the top management of the insurance company, which is controlled by the cooperative movement connected with the Lega delle Co-operative. The birth of a co-operative enterprise is characterized by the primacy accorded to collaborative association between people, be they consumers, users or entrepreneurs. The motivation, 1 involvement and participation , of workers have become very modern priorities in our post-fordist economy for most leading multinationals as well as smaller enterprises (Noe et al. 2006). In the present-day West European societies, characterized by mature democracy and the disappearance of ideologies and mass movements, the capacity for association among individuals has become

a precious asset to be protected and cultivated, above all in areas that have not ever known intense and constant social mobilisation and have always suffered from a shortage of social capital (Bourdieu 1980, Coleman 1990, Fukuyama 1995, Putnam 1993).2

Co-operatives in our economies Flexible specialization is the most successful organisational model in the new “industrial paradigm” (Sabel 1984) characterized by transition from the standardised mass production of similar goods by means of specific and non-flexible machines to nonstandardised production where organisation performs the task of adapting flexible plant to uncertain markets. The winning formula in this new paradigm is no longer the large-scale integrated company but the small firm capable of working with its neighbours to develop technical and human organisational capacity enabling it to adapt to market fluctuations and changes in the tastes and needs of consumers. The model that has emerged is based on growing integration, co-operation and competition between enterprises that belong to the same network. The traditional industrial paradigm prompting the pursuit of concentration and economies of scale is giving way – or at least according equal importance – to the model of networks, flexibility, the “soft” integration of districts, alliances, consortiums, and flexible forms of shareholding. The form of co-ordination developed within the network has no hierarchical rules and is not based solely on price mechanisms. In other words, we are outside Williamson’s market/hierarchy dichotomy (Williamson 1981) and inside a flow of vertical (twoway), horizontal (equal) and lateral (decentralized) relations (Ouchi 1980). The co-operative firm must find, and indeed has found, its own role in this scenario, one that can be brilliant and crucial in the intricately flexible and competitive relations between enterprises. It should, however, be pointed out immediately that the cooperative form of co-ordination of economic activities, occupying an intermediate position in the hierarchymarket continuum, is intrinsically difficult to achieve (Seravalli, Arrighetti and Wolleb 2001). It is the delicate result of balance that supports bottom-up collective

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

11

SPECIAL GUEST PAPER

action between people and firms. Such balance is difficult to establish and maintain in a world increasingly dependent and based on information that is witnessing the ever more frequent failure of the other two pure forms of co-ordination, namely hierarchy and the market (consider Stiglitz’s works on the consequences of the structural and pervasive lack of information, Stiglitz 1975). Given this awareness, economic theory has moved well beyond the bipolar hierarchy-market model and adopted an intermediate formula of transaction regulation, namely the clan or the collective (Barney and Ouchi 1985, Williamson 1986). This intermediate form, which is actually the oldest (Douglas 1986), remains the most difficult to establish in everyday practice. Thus it is no coincidence that hierarchy and market are the solutions most widely adopted. Though difficult to establish, it is, however, necessary and competitive once put in motion. Some anthropologists who have traced back the ancient roots of co-operation claim that bottom-up collective action is practically bound to disappear in open or large-scale communities (Douglas 1986, Levi-Strauss 1973). Consider the forms of collective or communitarian work that were so widespread not only in all the pre-Columbian communities but also in Asia. It is by no means irrelevant in this schematic overview to point out that in Europe the pure protagonists of the other bipolar model, i.e. state and market, are also proving more and more frequently incapable of meeting the demands made on them by the communities. Here too, as we shall see, there is an explosion of the bipartite model to make way for an intermediate figure, namely the third sector. In short, authentic co-operation could suddenly find itself modern, necessary, equipped to tackle the challenges of our day, and in some cases a step ahead of the traditional companies, which have always regarded it with suspicion and attitude of superiority. If this is true, co-operatives have something to offer workers, markets, and the communities on which they focus. This paper will examine how government and local authorities can help to harness these energies and this ancient modernity.

Between state and market Nearly all the European countries went through a cycle of massive state intervention in the economy and a phase of privatisation and liberalisation between 1945 and 2005. After the most important experience of state control in West Europe in the post-war years, the Italian economy in particular has been involved in an intense 12

process of privatisation and liberalisation since the 1990s (with marked deceleration in the early years of this century). Privatisation has been carried out in Italy with determination, even though the ownership structures deriving from the sale of former state-owned concerns have not always guaranteed correct transition to a market culture. Not always courageous and not always accompanied by adequate action on the part of the authorities responsible for control and regulation, liberalisation has produced no results. In other words, many of the markets involved in privatisation and liberalisation have not become competitive, many former state-owned concerns have not become contestable, many of the economic agents that have taken over from the state in the control of utilities, banks and industrial concerns have shown no desire or ability to operate with an adequate entrepreneurial market culture. Italian citizens have seen a slow but constant decline in the services provided by the welfare state since the 1990s. The retreat of the state with respect to certain demands expressed by citizens, has given rise of a new private-sector entrepreneurial class with much the same oligopolistic tendencies and no greater concern for the customers and users of regulated markets. The internal political instability caused by the crisis of the “First Republic”, and demographic changes have unquestionably been additional major factors of stress for Italian society. A still more important and often crucial role for social stability and economic plurality (Spear 2000) has been assumed in this context by intermediaries between state and market, individual and society, enterprise and citizen. The phenomenon appears to be common to most of the European continent but particularly intense in Italy, which underwent a radical political crisis in the 1990s that has yet to find resolution in a mature bipolar system. The demographic figures (OECD 2004) show marked aging of the population accompanied by the perception of reduced security and stability. In economic and institutional terms, we can see an industrial crisis due primarily to productive specialisation accompanied by historical inefficiency in the public sector. Let us consider the rapid growth of associative participation and voluntary service, the new leading role of co-operatives, the debate on the civil economy and the social responsibility of firms, and the growing interest in non-profit concerns and the third sector. This world – both associative and entrepreneurial, both for-profit and non-profit – constitutes not only a buffer between the two other major components of the

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

SPECIAL GUEST PAPER

western societies and economies but also in many cases a necessary contribution to the correct functioning of a plural, efficient, competitive market with respect for the consumer, the user and the citizen. It is, however, no easy matter to explain and defend the importance of these organisational forms in a world that is so uninterested in economic pluralism and practically convinced that we have indeed arrived at the “end of history” (Fukuyama 1992), at least on the economic front. History has not, however, come to an end, at least in the sense that there are different forms of market economy (Albert 1991) and different forms of company and company ownership as well as very different ways of running a firm in a market economy.

Co-operative identity and role The internal and external debate on co-operative values and identity has in any case regained presentday relevance and intensity. The question arises of whether there are qualitative or quantitative limitations to be placed on the operations of co-operatives to ensure protection of their identity. Co-operatives can hold shares in companies, including those quoted on the stock exchange. Even though there are few who believe that co-operatives should remain small and residual, there is discussion in Italy today about the need for limits to ensure that such shares are held with a view to the best possible pursuit of the co-operative’s mutualist objectives.3 While we believe it important for the plurality (Hansmann 1996) of the Italian economy 4 that co-operatives should be able to operate in all sectors and all markets, it is equally important that this should take place in accordance with the identity of the co-operative movement and its primary values, such as mutualism and democracy (Olsen 2002). The lack of homogeneity in the characteristics of the firms operating in a market increases the capacity to meet the needs expressed in that market . “There is a place in a modern mixed market economy for a model of business that is driven by the needs of the people who use its services rather than those who invest their capital in it. Indeed such forms assist the efficient and sustainable functioning of markets.” (Commission of the European Communities, 2001). Regardless of the economic and social sector of action, we believe on the whole that co-operation of the first, second and third degree can be seen as a tool or logic of corporate integration. There is a need for integration both at the national level (in a country like Italy, suffering from industrial dwarfism and now discovering to its cost that small is beautiful but not

sufficient) and at the European level, where it is becoming essential in an ever-increasing number of industrial sectors to attain the supranational critical mass needed to operate on the global markets. Co-operatives must make integration at group and sector level their watchword. They must experiment with processes of internationalisation and strengthen their international partnerships: not only a presence on foreign markets but also integration with other cooperative concerns. Interest attaches in this connection to a number of developments in Europe, e.g. the integration achieved between Danish and Swedish co-operatives. There are, however, also more streamlined forms of collaboration. For example, cooperatives from different countries can set up joint enterprises to market their products. Given the territorial nature of the co-operatives participating and the international dimension of the strategy adopted, cases of this type have been described as instances of authentic “glocalism”. We are convinced that co-operatives can demonstrate that it is possible to “square the circle” (Dahrendorf 1996), combining competitiveness and innovation, territorial roots and social and environmental sustainability. Co-operatives should accept this challenge and blaze an exemplary trail for other economic concerns. While co-operatives can certainly make a contribution, the regulating authorities must be fully convinced and aware that cooperation is a delicate plant that grows spontaneously but is not an aggressive weed. The spontaneity of cooperatives stems from the innate human tendency to work together. In the works produced immediately after his famous treatise on competition in the animal world, Darwin himself took pains to point out (not least in order to counter the apocryphal readings that have continued up to our day) that human evolution, unlike its animal counterpart, is based on cooperation, altruism and love rather than competition, selection and struggle (Pievani 2006). Moreover, this collaboration is not only typical of poor or struggling economies and communities. The co-operative lends itself to human collaboration in the satisfaction of both basic and higher needs. The co-operative serves to set up a store in poor, isolated village, to organise free and secure work, and to fight unemployment or exploitation but also to offer work with greater fulfilment and autonomy, to foster the spread of socially and environmentally sustainable foodstuffs, or indeed to buy and run an otherwise inaccessible sailing boat. In short, co-operation is a tool serving to overcome difficulties and the state of necessity or simply to meet higher demands in the pursuit of

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

13

SPECIAL GUEST PAPER

goods or values that society is not otherwise in a position to supply.

Co-operative action and process Though spontaneous and innate in human beings, as pointed out above, this form of organisation in also rare, not least because the co-operative formula requires specific ingredients that are not always readily available everywhere. Co-operatives are organised in a different way, for example, given that participation and democracy have organisational consequences (Davis 2004). The participation of co-operative members and workers rests on different motivations from those operating in traditional firms. Some have spoken of “ideological workers” (Ackerman 1986) and some of “ideological organisations” (Mintzberg 1996). The role of the trade union and the functioning of industrial relations are also different. With respect to the tripolar model of market, hierarchy and clan (Barney and Ouchi 1986), it seems possible to suggest that the transactions of co-operatives and their members are potentially subject in some cases to considerations not only of price but also of hierarchy and trust. With reference to Hirschman (1970), it seems possible to state that the weapons of exit, voice and loyalty are sometimes simultaneously available to co-operatives and their members. While having three weapons in one’s hand may prove very useful in some cases, however, it can also prevent reaction in others. In any case, cooperative behaviours are the result of equilibrium in situations of heterogeneity as regards aims, conduct, and the agents themselves (Spear 2004). As shown by Axelrod (1984, 1981), co-operative interaction is rare but possible and potentially stable, above all in a medium-term evolutionary and iterative perspective. The actors can learn to co-operate from the experience of previous interaction, they can be induced to do so through sunk investment, or they can be institutionally directed toward co-operation. In short, bottom-up collective co-operative action is more complex. This complexity must be handled and supported to ensure that it takes shape from strength rather than weakness. Co-operative firms are noncapitalist enterprises in that the ownership rights are not transferable.5 A co-operative is created in order to provide a service for its members and to do so with a democratic and transparent form of management based on participation. It is created in order to foster entrepreneurship in accordance with the territorial nature of the enterprise and the freedom of entry and exit for members. Co-operatives are enterprises controlled by members (workers, consumers, 14

producers or associated entrepreneurs). As Zamagni (2001) points out, the primary objective of the co-operative is “not the maximization of profit, as it is for the capitalist enterprise, but maximization of the social dividend defined as the difference between revenues and costs (but not including labour costs) divided by the number of members. This means that while in the capital-based enterprise profit is a residue that ends up in the hands of the owners and wages are a constraint, the exact opposite is true in the cooperative firm, where the remuneration of the holders of the capital is a constraint and the social dividend a residue.” Actually every economic explanation of the co-operative difference is not valid for every type of cooperative. This last one, as an example, is valid only for worker co-operative.

Co-operatives and the policy maker Co-operative firms are, however, enterprises integrated perfectly into the mechanisms and culture of the market economy, and it is precisely in the world’s most advanced market economies that they now account for a larger (and often growing) proportion of national income. It is precisely in these economic contexts that co-operatives often help to counter the effects of market failures. Company control is based on individuals and not on capital (per capita voting). These individuals, i.e. the members, forgo the use of their property rights because it is impossible for those leaving the co-operative to obtain the increase in value of economic capital incorporated in their share of the firm. In return for this sacrifice, legislation in many countries offers the benefit of tax exemption on a proportion of the profits; to the extent that members (owners) and customers (users) are the same persons, no profits can be derived in order to be taxed. The tax exemption of profits channelled into an indivisible reserve (as in the fiscal policy of Italy and other countries) can, however, also be seen in actual fact as no more than an incentive to company capitalization (Similar laws encouraging co-operative capitalization also exist in certain countries for non-cooperative firms). For this reason, there is nothing extraordinary about the present system capable of damaging the functioning of the market. On the one hand, entrepreneurs taking a critical view of the advantages enjoyed by co-operatives can convert their firms into co-operatives whenever they choose. On the other, tax schemes to encourage capitalization have always existed and will continue to do so also for traditional firms. Moreover, all economists, politicians and leaders

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

SPECIAL GUEST PAPER

of entrepreneurial organisations with a knowledge of the demographic statistics for Italian firms6 should take great interest in the ability of co-operatives to be intergenerational and, in exemplary cases, oriented toward capitalization. The figures for the last 15 years clearly indicate a strong tendency toward growth on the part of Italian co-operatives, unlike the average Italian firm. Moreover, current Italian legislation requires cooperatives to allocate 3% of their profits for social purposes, which is usually done through the national mutualist funds for training and promotion in the cooperative sphere. This legislative provision constitutes one of the stimuli behind the efforts of co-operatives in the sector of social solidarity and mutual aid (also at the external level), together with their traditional values and ideology. Those who have questioned in recent months the legitimacy of a joint-stock corporation being controlled through the stock market by a company that is a co-operative and hence not contestable cannot ignore the fact that none of Italy’s major quoted companies are actually contestable on the market because they are controlled by intricate interlocking systems of shareholders’ agreements permitting the iron-clad protection of ownership rights with minimal amounts of capital. The ownership of unquoted firms is also extremely concentrated and almost equally as nontransferable in practise as the co-operative.

Size? A certain nominal institutional form does not mean we will always have a good corporate behaviour. For these reasons it does not make sense, in the light of the above considerations, to call for limits to be somehow imposed on the size of co-operative firms or to restrict the sectors in which they or their subsidiaries can operate. In any case, large and successful co-operatives do not necessarily stop being “good” co-operatives. Growth in terms of scale (social base, balance sheets, organisational complexity, etc.) and age is not always accompanied by a loss of cultural and democratic values. There are no industrial sectors where cooperatives maintain or lose their identity by definition. Functional and organisational development is not incompatible with preservation of the co-operative identity. It should be borne in mind that the same phenomena of false co-operation are already present all over the world from Colombia to Chile, from Finland to Spain, which proves that is not even the degree of social development and prosperity that fosters or deters them (Bernardi 2005).

Criteria for the evaluation of cooperative authenticity

The growth of co-operatives is necessary in many industrial sectors and the tool of the co-operative group is useful as well. It is also a good idea to experiment with processes of internationalisation and to concentrate the attention of the co-operative movement on the need for organisational development and on the question of generational turnover, which is currently assuming ever-greater importance.

Non-profit?

Participation?

The recent demands for co-operatives to remain in the “non-profit” area of the Italian economy make no sense. All in all, it must be stated again that cooperatives are non-capitalistic but oriented toward the market and the pursuit of results ensuring their stability and growth in terms of finances and assets. We can say Co-operatives are “not for profit” in the sense their aim is not to achieve profits for distribution to the owners of capital. Notwithstanding most co-operatives still have to make a return on capital employed sufficient to grow at a competitve rate in their particular marketcontext. Not all co-operatives operate in the third sector. Actually neither “in profits” nor in “not for profits” is where the co-operative difference lies. Co-operatives are bodies resulting from a unique system of ownership and governance endowed with a particular social responsibility to meet the developmental needs of their members, other stakeholders and the wider community.

The problem of false co-operatives unquestionably exists in Italy, and it is in this area that the problem of unfair competition comes into play. There are cooperatives in name only, where the members have no real right to participate in the decision-making process. Current Italian legislation grants tax benefits only to “predominantly mutualist” co-operatives, where relations with members account for at least 51% of the business (work or sales, depending on the type of co-operative). This indicator is not, however, sufficient. Apart from the quantitative yardstick, it is necessary to identify a new system of parameters in order to attribute mutualist merit. Not all the “predominantly mutualist” co-operatives, in the sense indicated by current legislation, are good cooperatives and mutualistically meritorious, and vice versa. The quantitative provision is certainly insufficient to assess mutualist merit. Why not propose legislation or a system of voluntary certification designed to limit the phenomenon? One possibility

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

15

SPECIAL GUEST PAPER

would be a national co-operative logo with certification of managerial qualities and democratic governance (based on an ISO or TQM model accompanied by a social report). The local authorities must become more perspicacious in the formulation of calls for tenders to select co-operative firms that are meritorious from all points of view. Co-operative firms seem to be intrinsically organisations oriented toward a lower degree of consumption of social capital (Spear 2000). This is not because they are “better” more socially responsible by definition – we are indeed well aware that this is not so – but simply because the functioning of co-operatives requires the production and use of social capital (Fukuyama 1999, Hollis 1998) rather than consumption. Suffice it to consider the way they are run through democratic assemblies, their links of mutual aid with other co-operatives, and the extent to which they are rooted in local communities. Suffice it note that the regions with the greatest co-operative tradition and vocation in Italy are those to which Putnam (1993) attributes a higher level of public spirit. It must be said, however, that with the authoritative exceptions of Walras and Alfred Marshall (1890), who noted the superiority of the work of the co-operative movement, the classical and neoclassical economists have always viewed the co-operative enterprise with suspicion and denied the existence of any specific economic behaviour on the part of co-operatives in terms of economic theory. Some have indeed endeavoured to demonstrate the economic inefficiency and limitations of self-managed enterprises (e.g. Einaudi, Pantaleoni and Ward). The opposite approach is instead taken in both the strictly economic and the philosophical works of Jaroslav Vanek (1970, 1985, 2000), the illustrious economist of Cornell University, who went so far during the last years of his intellectual career as to trace the origins of cooperation in the history of Christianity. Keynes and Robertson conversed on the macroeconomic effects of the presence of cooperatives, as an example, in terms of stability of the economic cycle. Another theoretical explanation of the economic significance of co-operative firms suggests that their competitive advantage is based on the efforts of consumers to overcome the uncertainties associated with the presence of informational asymmetries in the purchasing of goods and services. With reference to the question of differentiation and identity, it could be argued that for some years now various Italian co-operatives have stopped insisting on their differentiation or made an effort to become more 16

similar to other firms because of their inability to communicate the positive nature of their difference. They have at least stopped proclaiming their differentiation in terms of an alternative to capitalistic company control (which remains the only true difference for economists). It has for some time now been another difference that is insisted on in image campaigns, in the co-operative corporate identity, and in the conferences of the co-operative organisations. This is based on a democratic approach, social solidarity and responsibility, the ability to foster local development, and attention to the rights of members and consumers. It can also be added that it is intrinsically visible in the tradition of self-managed and co-operative work that development is freedom (Sen 2001), that the well-being and autonomy of workers and entrepreneurial success are not only compatible but also interconnected.

The problem of poor image of the cooperative sector The co-operative image is in need of improvement. The co-operative enterprise must be conceived and communicated externally as the form ensuring the greatest degree of well-being for workers as well as the most economically advantageous conditions for users and consumers. A report of the European Commission uses this definition: “A co-operative is an enterprise like any other, but it is also an enterprise that exists to serve the needs of the members who own and control it, rather than solely to provide a return on investment. All enterprises exist to serve the interests of their cardinal stakeholder groups. For traditional companies that means investors, however in a co-operative returns on capital (which are in some cases permitted) must always be subordinated to other interests. In fact a nonco-operative enterprise might be called an association of capital (or investor-driven business) whereas a co-operative is an association of people (or people-driven business).” (Commission of the European Communities, 2001). Paradoxically enough, it is precisely this very important public report that offers the most striking example of the identity problems discussed here. It is very strange that the European co-operative movement, which certainly had contributed to the drafting of that report, allowed it to be written that the

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

SPECIAL GUEST PAPER

co-operative is an enterprise like any other. Cooperatives are very particular enterprises indeed and very different from other forms of economic organisation.

The impact of life cycle and change on co-operatives This change in attitude with respect to the system is a characteristic that Meister (1969) and Zan (1982) noted through an empirical study ot the orgarnizatonal lifecycles7 of co-operatives and that it appears possible to use metaphorically today in discussing the state of the co-operative movement as a whole. The authors have two different visions of the evolution toward the market, professionalism and efficiency of cooperatives. On the one hand, there is optimism that cooperative values and features can stand up to competition from capitalist firms; on the other, pessimism that growth, reorganisation, and time will irreparably transform the co-operative spirit of the movement. According to Meister there are generally four lifecycle phases among co-operatives. In phase I, denominated by the author as the phase of conquest, there is hope and enthusiasm of members, low degree of differentiation in the social system, direct democracy and emphasis on assemblies. There is low differentiation of organs and positions and responsibilities are assumed on a voluntary basis. There is an imprecise economic management with low levels of efficiency and results falling far short of expectations. In phase II, called phase of consolidation, we usually find idealism giving way to indifference and greater differentiation of roles. The power of management groups is reinforced with differentiation of organs, delegation, attention to economic questions. In phase III, named phase of coexistence, we usually find subordination to the external environment also in terms of values. There is always greater expansion of delegation and adoption en bloc of methods previously described as capitalist. In phase IV, called phase of management power, the economic, organizational and managerial complexity necessitate the maximum degree of specialisation. Managers and directors (not always coming from an internal career path) hold the real power and no real control is exercised by members or their delegated representatives. The concentration of information in the hands of experts is high.

According to Zan there are generally three phases in the co-operative organization lifecycle. In phase I, named, phase of defence we usually find collective enthusiasm and direct democracy. There is organisational simplicity and mechanical solidarity. The members share an internal closure, the union of weaknesses, the rejection of the market and the culture of struggle. In phase II, denominated phase of consolidation, there is an initial political and economic success that brings an increase in size and complexity. This, in turn, brings delegated democracy, crisis of solidarity, opening of social base and acceptance of market although pointing out its contradictions. In phase III, named Industrial phase, the economic consolidation suggests an organisational rationalisation with greater formalisation and organic solidarity. At the end the culture of the market facilitated with the arrival of new members and managers coming from the outside will prevail. The partially diverging theses of Zan and Meister are broadly discussed and analysed in a recent work on the organisation of co-operatives (Battaglia 2005), which compares Italian, European and Latin American case studies in an effort to take stock of the relationship between growth, the continued existence of ideological, cultural and participatory characteristics, and the external influence of what is known as the cooperative organisational field (DiMaggio, Powell 1991, Battaglia 2005). One of the identity problems facing cooperative firms today seems to be the search for a way to preserve their differentiation while complying with most of the rules of the system. It is necessary first to consider the cornerstones of this differentiation and bring them into line with the new requirements of society and the economic system, and second to pursue and defend this differentiation – or new differentiation – through coherent and transparent interaction with the other forms of business and all their stakeholders. Only when both the national co-operative organisations and the individual firms have thoroughly considered the questions of identity and differentiation will it be possible to address the problem of the growth strategy of the co-operative movement. Only then will it be possible to discuss, for example, the advisability of certain financial or industrial operations, mergers and alliances, or the instrumental use of capitalistic firms. In any case, it already appears obvious that the decision to do without modern entrepreneurial tools serving to compete on an equal footing with capitalist (or traditional) firms would involve too great a risk. While it would be a mistake, in our view, to impose legislative

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

17

SPECIAL GUEST PAPER

limits on the sectors in which co-operatives can operate, it is undeniably true that the co-operative formula proves particularly competitive in some industrial sectors and not in others. It can be suggested initially that this derives from differences in the combination of the productive factors of capital and labour in the different industries. It then appears equally obvious that the traditional links between Italian co-operative organisations and political parties (especially the old Communist and Christian Democrat parties) must be reinterpreted in order to meet the new requirements not only of cooperation but also of the political sphere and the national economic system. While the existence of a cultural matrix is a strength and a source of riches, cooperatives and the organisations representing them must maintain their independence with respect to national and local politics (and vice versa). Dialogue with all the social and economic actors, including the political, is instead indispensable and advisable. The consideration of co-operative identity certainly cannot overlook the importance of the real degree of democracy and participation in the decision-making processes. There can by no co-operation if member participation is not practised, cultivated and fostered by management. Members must be qualitatively and quantitatively involved more frequently in the decisionmaking processes and in the renewal of managerial structures. It is necessary to strengthen the mechanisms of democratic participation (e.g. by examining the issue of delegation and voting at a distance) so as to avoid any undue increase in the powers of managers (sometimes professionals hired from outside) at the expense of the membership. This is a currently relevant problem in Italy but also in the rest of the world. And the role of human resources in company competitiveness is far more critical today than in the past all over the world. Motivation, empowerment, delegation and participation are becoming extremely powerful and indispensable tools above all – but not exclusively – in knowledge-intensive firms and services. Co-operatives can derive an advantage from this because they have been accustomed to worker centrality and involvement from the very outset. And then, how can the cooperative tradition not be regarded as modern at a time when so many are calling for greater industrial democracy? Borzaga (2002) points out that social cooperatives, “……..seem to have succeeded in finding ways to govern their strategic factor of production, i.e. labour, that are more efficient than those 18

adopted by the public sector, capitalist firms and most of the other non-profit organisations. While paying their workers less on average than the other organisations operating in the sector of social services, they adopt salary structures that reward seniority and loyalty, and appear capable of attracting young educated and motivated workers through incentives other than salary. It also appears that the social co-operatives have succeeded so far in attracting a well-trained and motivated workforce and adopting wage and organisational strategies perceived as fair by their workers despite the limited scale of their resources.” There are nevertheless also different economic explanations of the successful presence of cooperatives in our markets outside of the social cooperative area (Ackerman 1986, Hansmann 1996).

The importance of control and governance We consider it important to return to the question of control over the firm. As Hansmann (1996) points out, there are efficiency-related grounds to establish when it is preferable that the owner of an enterprise should be one of the possible parties operating in our market economies: the entrepreneur, the investor, the state, management, the users, the workers, etc. It is context alone that determines the conditions enabling one of these to perform the function more efficiently. There should be no prejudices with respect to one or more of the potential owners (Olsen 2002). “The freedom of enterprise is a fundamental characteristic of the most advanced modern economies. Capitalism, on the contrary, is contingent; it is simply the particular form of ownership that most often, but certainly not always, proves most efficient with the given technology.” And it is precisely comparison and competition between different forms of company control that can produce positive effects for the markets. But are the mechanisms through which the members of a cooperative, the owners of this form of enterprise, can supervise and assess its progress adequate today? Since the type of ownership is different, there are also differences in the challenges of co-operative governance (Cornforth 2004). Corporate governance is to be understood as a set of tools (institutions, rules, mechanisms, guarantees) designed to foster a correct

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

SPECIAL GUEST PAPER

decision-making process within the company in the interests of the various categories of stakeholders (Powell 1987). The problem of governance arises with the separation of ownership and management in largescale corporations. The alleged scandals and industrial crises of the last few years have made this a currently relevant problem, and not only in Italy. Co-operative business systems with highly fragmented ownership (or rights) require particular attention, and this problem is further complicated by the imperfect transferability of ownership rights and the greater number of types8 of stakeholder in the co-operative. The reform of company law has had a partial effect in this sector.9 The typical – and opposite – risks are the inability of the member or groups of members to exercise the correct degree of control and guidance over management and the inability of management to implement adequately competitive strategies enabling the firm to operate on the market. It is obviously impossible to address this question without going into the details of each type of co-operative.10 For example, the control over company internal bodies, with respect to the management of co-operatives making great use of equity stakes in instrumental companies, appears to be a very sensitive and critical issue because it is more difficult to exercise control, because the risk of deviation with respect to the original and statutory objectives is greater, because the divergence of goals between management and members is potentially greater, and because of the potential growth of nontransparent conduct. At the same time, however, there can also be growth in mutualist effectiveness with respect to members or to the competitiveness of the core activities managed directly by the co-operative. It is important to let members select the system of management and to specify the roles of the elected and of the appointed leadership. There are, however, some possible reforms that appear suitable for practically all of the co-operative world, including the rotation and limitation of appointments, greater use of proxies in general meetings, independence of management, controls over the indirect distribution of ownership shares, adequacy of organisational structure in relation to size and type of co-operative, certainty of mutualist exchange, adequate information and involvement of the grassroots membership, and the co-ordination of control functions. Reflection also appears necessary because there is no lack of different schools of thought even within the Italian co-operative movement.11 As regards proxies, for example, those in favour are opposed by other who think that democratic

participation must be individual rather than delegated and that therefore only the former is to be fostered and promoted, e.g. through the mechanism of separate assemblies. Many react very negatively to talk of limitations on mandates for company appointments, e.g. by pointing out that no such limitations exist in traditional firms.12 The squaring of the circle can only come about, however, through an understanding of co-operative differentiation and identity. We are talking about enterprises that differ from others starting from their system of ownership rights, enterprises of an initially democratic nature that see the fragmentation of their members’ rights increase together with their growth. Paradoxically enough, in a context of family entrepreneurship such as obtains in Italy, co-operatives are experiencing the centrality of management and the necessary division of ownership and management before traditional firms (as happened previously with the state-owned companies). It is necessary to consider the risk of the major co-operative firms coming to operate like authentic public companies but without some of the safeguards provided for quoted companies, e.g. mechanisms of association and representation for small shareholders, more stringent procedures of auditing and control, a framework to regulate conflicts of interest, etc. It is in any case be possible to argue theoretically that the major cooperatives, unlike quoted companies with vast numbers of shareholders, would not encounter the typical risk of management oriented toward predominantly short-term objectives (being motivated, for example, by reward systems linked to share prices). The development of participatory mechanisms with multiple voting involves the risk, however, of producing a hybrid in still greater need of innovative mechanisms of governance (Spear 2004).

Conclusions The leitmotiv of this discussion appears to be differentiation, something often put aside, forgotten or viewed with suspicion by the co-operative members themselves. In our view, the international co-operative movement should regain its pride in its diferentiation and use this as the basis to reconstruct its identity. It is possible to trace a consensus in the economic and organisational literature on the differentiation rather than the superiority or inferiority of the cooperative entrepreneurial formula. In particular, differentiation combined with the characteristics of markets and technologies becomes a competitive advantage in some industrial sectors and a

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

19

SPECIAL GUEST PAPER

disadvantage in others. We believe, however, that it must be the market and not legislation that sets limits on the operations of co-operatives. We believe that the residual tax benefits granted to co-operatives in Italy and many other countries are prompted by their differentiation and in no way prejudicial to the correct functioning of market; to the extent that members and customers are the same persons, no profits can be derived in order to be taxed. These advantages are in any case available to anyone opting for the co-operative form of enterprise. Co-operatives do not ask for privileges. The treatment they receive must remain partially different because they are inherently different. The strategy for the next one hundred years of cooperation in Italy needs to address the question of cooperative differentiation and identity. In any case, an understanding of present-day differentiation is essential, for example, to the use of forms of training capable of guiding co-operative management toward ethical differentiation and an understanding of the organisational and operational peculiarities of enterprises of the co-operative type. Co-operative management must be able to operate in a different type of firm but must also be equipped with the entrepreneurial tools used by non-co-operative companies.(Davis, 1999) Co-operative firms are different and must remain so. Their ancient modernity is the strength upon which they can draw in addressing the market for human services. It is certainly not a good idea to conceal the need for entrepreneurial and organisational development. Co-operatives must be capable of coping with generational turnover and handling the degree of organisational development that is indispensable for healthy growth. Growth must be managed but is essential in many industrial sectors for firms wishing to be competitive at the national and international level.

Resumen ¿Las cooperativas y la acción cooperativa son experiencias modernas? Por qué debería llevarla a cabo el actor político en las políticas de desarrollo? Qué diferencia cooperativa hay desde el punto de vista de la teoria económica y de la organización? Y, si existen diferencias en cuanto a la organización, en la práctica de la gestión de los recursos humanos, en los derechos de propiedad y en las actitudes de acción colectiva, ¿cuáles son las cuestiones de gobernabilidad que tienen que controlarse para que la cooperativa pueda operar y crecer adecuadamente? 20

Riassunto Le cooperative e l’azione cooperativa sono una esperienza moderna? Perché dovrebbero essere sostenute dal policy maker nelle politiche di sviluppo? Quale è la differenza cooperativa dal punto di vista della teoria economica e dell’organizzazione? E se ci sono differenze nell’organizzazione, nelle pratiche di gestione delle risorse umane, nei diritti di proprietà e negli atteggiamenti di azione collettiva, quali sono le questioni di governance che devono essere tenute sotto controllo affinché la cooperativa possa operare e crescere adeguatamente?

Notes 1. See in this connection the partial results of the Metatrend 2004 study carried out by the CRORA research centre on business organisation of the Bocconi University under the supervision of Anna Grandori, which draws attention to the competitive importance of mechanisms of organisational equity and democracy in firms. 2. Putnam’s notion of social capital is linked to the concept of civic tradition and is a collective asset rather than a resource enjoyed by individuals. Bourdieu’s is less tied to the tradition of a certain community: “Social capital is the set of actual or potential resources connected with the possession of a lasting network of more or less institutionalised relations of reciprocal knowledge and recognition, i.e. with belonging to a group (…). The volume of social capital possessed by a particular agent therefore depends on the scale of the network of connections that he can effectively mobilise and by the volume of capital (economic, cultural and symbolic) held by each of those with whom he is connected.” The view put forward by Fukuyama is oriented toward the idea of trust and the sharing of values. Other views occupy an intermediate position between the ideas of the relational network and a shared tradition of values and trust. 3. Some co-operative managers have, for example, called for legislation taking into account new forms of mutualism, e.g. at the group level. 4. Plurality of forms of enterprise and ownership structure: ownership by shareholders, workers, users, or in some cases (why not?) through public shareholding. 5. The very concept of economic capital loses its meaning because it is impossible to transfer or sell the enterprise.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

SPECIAL GUEST PAPER

6. Dwarfism and difficulties in handling family succession are critical issues in the Italian entrepreneurial system. 7. Other studies on organizational life cycle, such as Greiner (1972), Alderfer (1972), Whetten, Kimberly, Cameron (1980), Quinn and Cameron (1983), Baum and Singh (1994), Van de Ven, Poole (1995), Aldrich (1999), were born around capitalist traditional firms and do not always work with the co-operative organizations. For example Greiner cycle from some points of view result inverted in co-operatives. 8. In some cases, for example, there are theoretically clashes between the interests of the member and the worker or the member and the consumer, stakeholders that are often represented, however, by the same individuals. Moreover, the benefits that members wish to derive from their membership of the co-operative are nearly always much more complex than those of the shareholders of public companies, who expect no more than dividends and capital gains. Nor are they always and exclusively of an economic nature. 9. As a result of the reform of company law, the traditional system of a board of directors or single chief executive is now flanked by the “dualistic” and “monistic” systems. Under the dualistic system (of German derivation), responsibility for management and control is assigned to a supervisory board, appointed by the general meeting, and a management board appointed directly by the supervisory board, which also approves the balance sheet. Under the monistic system (of Anglo-Saxon derivation), responsibilities for management and control are instead assigned respectively to the board of directors, appointed by the general meeting, and a committee for management control set up within the same, the members of which must possess particular requisites of independence and professional expertise. 10. Size is also a crucial variable. Structure and mechanisms of control differ greatly from the viewpoint of organisation theory and economic theory depending on whether the co-operative is small, medium or large. 11. There are even differences of opinion as regards the question of increasing the ratio of member workers to non-member workers or the need to accelerate decision-making processes. The debate on governance is also open, however, with respect to non-co-operative firms.

12. The problem of the effective nature of members’ rights also exists, however, in associations, trade unions and political parties.

References Books Ackerman Rose S., (1986), The Economics of Non-profit Institutions, Oxford University Press. Albert M., (1991), Capitalisme contre capitalisme, Paris, Edition du Seuil. Alford H.and Naughton M., (2001), Managing as if Faith Mattered: Christian Social Principles within the Modern Organization, Notre Dame University of Notre Dame, Press. Ascoli, U., (2003), The welfare mix in Europa, Roma, Carocci. Axelrod R.,(1984), The Evolution of Cooperation, New York, Basic Books. BagnascoA., Piselli F., Pizzorno A., Trigilia C., (2001), Il Capitale Sociale, Bologna, Il Mulino. Barney J. B., and Ouchi W. G., (1986), eds., Organizational Economics. San Francisco, Jossey-Bass. Battaglia F., (2005), Teoria dell’organizzazione e imprese cooperative, Milano, Guerini. Bernardi A., (2005), Cooperative europee e sudamericane, in Battaglia F., Teoria dell’Organizzazione e imprese cooperative, Milano, Guerini. Borzaga C., Zamagni S., and Mazzoli E., (2005), a cura di. Verso una nuova teoria economica della cooperazione, Bologna, Il Mulino. Coleman J. S., (1990), Foundations of Social Theory. Harvard University Press. Davis, P., (1999) Managing the Co-operative Difference. A survey of the application of modern management practices in the co-operative context, Co-operatrive Branch, International Labour Office, Geneva, pp134. Davis P., (2004), Human Resource Management in Cooperatives. Theory, Process and Practise, Co-operative Branch, International Labour Office, Geneva, pp. 206. DiMaggio P. J. and Powell W.W., (1991), The New Institutionalism in Organizational Analysis, Chicago, University of Chicago Press. Douglas M., (1986), How Institutions think, Syracuse, Syracuse University Press. Fukuyama F., (1992), The End of History and the Last Man, London, Penguin. Fukuyama F., (1995), Trust: The Social Virtues and the Creation of Prosperity, New York, Free Press. Fukuyama F., (1999), The Great Disruption: Human Nature and the Reconstitution of Social Order, New York, Free Press.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

21

SPECIAL GUEST PAPER

Hansmann H., (1996), The Ownership of Enterprise. Cambridge, (Mass), Belknap Press. Hirschman A. O., (1970), Exit, Voice, and Loyalty. Responses to Decline in Firms, Organizations and States, Cambridge, Mass, Harvard University Press. Hollis M., (1998), Trust within reason, Cambridge University Press, Cambridge. Marshall A., (1890), Principles of Economics, London, Macmillan and Co. Keynes J. M., (1971), A Treatise on Money, in Moggridge D., edited by, The collected writings of John Maynard Keynes, MacMillan, London. Jossa B., (2004), a cura di, Il Futuro del Capitalismo, Il Mulino, Bologna, 360 p. Levi-Strauss C. ,(1973), Anthropologie structurale II, Paris, Plon. Meister A., (1969), La participation dans les associations, Paris, Atelier. Mintzberg H., (1983), Designing Effective Organizations, New York, Prentice-Hall.

Journals Axelrod R, (1981), “The Emergence of Cooperation among Egoists”, American Review of Political Science, n. 75, pp. 306-318. Bourdieu P., (1980), Le capital social: notes provisoires, in Actes de la Recherche en Science Sociales, 31, pp.2-3. Coase R. H., (1937), The Nature of the Firm, Economica, n.4, pp.386-405. Cornforth C., (2004), “The governance of cooperatives and mutual associations: a paradox perspective”, Annals of Public and Co-operative Economics, 75, 1. Dahrendorf R., (1996), Prosperity, Civility and Liberty: Can We Square the Circle?, Proceedings of the British Academy, Volume 90, pp. 223-235. Olsen O.J., (2002), “Consumer ownership in liberalized electricity markets. The case of Denmark”, Annals of Public and Co-operative Economics, 73, 1. Seravalli G., Arrighetti A. and Wolleb G. , (2001), “Social Capital, Institutions and Collective Actions between Firms”, Conference paper, Social Capital: Interdisciplinary Perspectives, University of Exeter.

Noe R.A., Hollenbeck J.R., Gerthart B., and Wright P.M., (2006), Human Resource Management, 5th Edition, McGraw Hill, New York.

Spear R., (2000), “The co-operative advantage”, Annals of Public and Co-operative Economics, 71, 4.

Pendenza M., (2000), Cooperazione, Fiducia e Capitale Sociale, Napoli, Liguori Editore.

Spear R., (2004), “Governance in democratic member-based organisations”, Annals f Public and Co-operative Economics, 75, 1.

Pievani T., (2006), La teoria dell’evoluzione, Il Mulino, Bologna. Powell W. W., (1987) edited by, The nonprofit sector, Yale University Press, New Haven, 464 p. Putnam R, (1993), Making Democracy Work: Civic Traditions in Modern Italy, Princeton, Princeton University Press. Sable C. F., (1984), The Second Industrial Divide, New York, Basic Book. Sen A., (2001), “Democrazia cooperativa e globalizzazione, Libertà e cooperazione, Firenze”, Il Ponte. Vanek J., (1970), The General Theory of Labor-Managed Market Economies, Ithaca, Cornell University Press. Vanek J., (1985), Imprese senza padrone nelle economie di mercato, Roma, Edizioni Lavoro.

Stiglitz E.J., (1975), “Incentives, Risk and Information: notes towards a theory of hierarchy”, Bell Journal of Economics, Vol. 6, No. 1, Spring. Williamson O. E., (1981), The economics of organization: The transaction cost approach. American Journal of Sociology 87(3): 548-577. Miscellaneous Commission of the European Communities, (2001), Cooperatives in Enterprise Europe, Brussels, consultation paper. OECD, (2004), Italy, Ageing and Employment Policies, Geneva. Ouchi W. G., (1980), Markets, bureaucracies, and clans. Administrative Science Quarterly, March, 129-141.

Vanek J., (2000), Unified theory of social systems, a radical Christian analysis, New York, Ithaca. Williamson O. E., (1986), The Economic Institutions of Capitalism. Firms, Markets, Relational Contracting, The Free Press, New York. Zamagni S., (2001), L’impresa cooperativa nell’era della globalizzazione, Libertà e cooperazione, Il Ponte, Firenze. Zan S., (1982), La cooperazione in Italia, Bari, De Donato.

22

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

LEADERSHIP

Leadership: a moral and ethical perspective Samuel M. Natale, Anthony F. Libertella, Brian M. Rothschild and Sebastian A. Sora

Abstract

Key words

The two traditional styles of leadership most often referenced are the transactional and the transformational. In this paper, we approach leadership from a moral and ethical perspective. This paper focuses on the moral compass inside every leader, which enables him or her to engage in meaningful, authentic moral dialogue and discernment with their organization, while remaining anchored in his or her unique moral beliefs (Thompson, 2004). The leader’s moral compass enables him or her to guide the organization and his or her followers in an ethical and moral direction. According to Bill George, author of the Authentic Leadership (2005), leaders are those who are committed to a purpose or a mission, so they live by their values and know the true direction of their moral compass. Effective leaders utilize an internal set of morals and principles to navigate the often-treacherous waters of business and set a course for success before making a decision (Covey, 2000). According to various researchers through the practice of these virtues, leaders acquire the inner-directed and habitual strength of mind that will incorporate a strong moral compass and moral principles in their behavior. In today’s business climate, which is still reeling from some of most highly publicized cases of corporate fraud, the moral direction provided by leaders is essential for long-term success of an organization (MacRae, 2002). Although the qualities of moral leadership may be defined differently by various researchers, it is thought that the development of one’s moral compass begins in childhood, where parents introduce youngsters to the principles of right and wrong actions as well as the concepts of fairness, decency, and compassion (Amen, 2004). Many of the recent corporate ethics scandals have been committed by graduates of some of the most prestigious business schools. This has led schools to place increasing emphasis on ethics education. For some institutions, this has meant the introduction of stand-alone classes in ethics, while other institutions have sought to infuse ethics into various business courses. “Real leadership requires years of development and hard work” (George, 2006). Although this process may well begin in childhood, higher education institutions and leadership development programs can play a vital role in developing ethical and moral leaders.

Moral and Ethical Leadership, Moral Compass, Ethical Leadership Development

Introduction Leadership is described as having many manifestations. The two most commonly discussed styles are the transactional and the transformational. The transactional leader focuses on the efficiency of his or her management style and is more tactical in nature with an emphasis on immediate problem solving. On the other hand, the transformational leader has a holistic understanding of his or her position and influence characterized by a strategic outlook as well as a vision that inspires his or her followers. The most recent studies on leadership suggest a third style known as laissez-faire leadership. This leadership style encompasses characteristics that focus on administrative effectiveness and self-directed management with a hands-off approach (Tatum, Eberlin, Kottrava & Bradberry, 2003). Leadership is a multifaceted field with different issues depending on the perspective from which it is addressed. In this paper, leadership is addressed from its moral and ethical perspective. This paper focuses on the interior of every leader – the moral tenets that the leader uses to guide followers as well as the assumptions he or she makes in formulating decisions. The authors utilize Thompson’s (2004) belief, which states that every effective leader is guided by internal moral solidarity, which is referred to as a moral compass. As Thompson (2004) further elaborates, the moral compass is one of the leader’s virtues, qualities, roles, and approaches for creating moral solidarity for his or her followers. The moral compass inside every leader enables him or her to engage in meaningful, authentic moral dialogue and discernment with their organization, while remaining anchored in his or her unique moral beliefs (Thompson, 2004). This paper provides an introduction to several basic concepts that are necessary as a starting point in understanding leadership concepts, principles, and styles. Following these basic concepts, it will also provide an overview of the leader in utilizing their moral compass in the proper guidance of their followers to achieve mutual goals. Lastly, this paper will explore the development of ethical and moral leaders.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

23

LEADERSHIP

Definition of leadership As Paglis and Greene (2002) explain, there are numerous definitions of leadership. Some view leadership as a course of action in which the leader determines where the organization is at present, where it needs to go in the future, and then devises a strategy to achieve this goal. Leadership is also seen as the process in which an organization’s goal is identified, a strategy is developed to attain the goal, and group members or followers are directed and encouraged in efforts toward achieving the goal. Furthermore, leadership is also managing change by establishing influence over followers, encouraging followers to concentrate their efforts on achieving changes in the objectives, and leading followers in facing the challenges to attaining the desired change. In addition, Kakabadse (2000) points out that some scholars view leadership from a behavioral and personal perspective. Accordingly, leadership is seen as the personal relationship between the leader and the followers toward working for a shared goal. Others view leadership as aspects of behavior, whether positive in nature and under the control of the leader, or reactive as a result of multiple external forces. Regardless of the various definitions of leadership, they all agree on the leaders preoccupation with strategic and relational goals and with the profound influence leaders have on the organization. The degree of emphasis and the manner of achieving followers acceptance, co-operation and commitment remains problematic in terms of leadership style and organizational resources and purpose.

Leadership styles Tatum, Everlin, Kottrava, and Bradberry (2003) discuss the three most common styles of leadership. According to Tatum et al., scholars have viewed leadership styles as transformational or transactional, and recent research suggests a third style: laissez-faire. Tatum et al. describe transformational leaders as having a vision of the future, and by relying on their magnetism, they motivate their followers to strive toward reaching their shared goal. Transactional leaders are tactical in their management approach concentrating on short-term goals with a compensatory reward system for their followers. Laissez-faire leaders are seen as slow to react, often distant and characterized by their “passiveavoidant” and “management by exception” style of leadership. Despite leadership having many definitions and styles, as described above, the authors believe for 24

leaders to be truly successful it is their moral and ethical framework that guides them in properly leading their organizations. Below we point to a growing body of literature that recognizes the importance of underpinning leadership with a strong ethical or moral compass.

Moral compass The leader’s moral compass enables him or her to guide the organization and his or her followers in an ethical and moral direction. According to Bill George, author of Authentic Leadership (2005), leaders are those who are committed to a purpose or a mission, so they live by their values and know the true direction of their moral compass. Moreover, a true and effective leader has a behavior consisting of an influence process that is consistent with ethical and moral values (Mendoca, 2001). Research has shown that during the decision-making process leaders utilize three types of assumptions: assumptions about themselves, assumptions about others, and assumptions about the world. The accuracy of these assumptions is determined by the leader’s moral compass (Wilson, 1996). Acting as the moral compass of an organization, the leader can navigate the intricacies of situations and uncover the information that may not be readily apparent. For every organization, its leader’s moral compass will be at the root of the organization’s effectiveness, efficiency, cohesion, and acceptability to society. Therefore, leaders determine the direction for their organizations, making themselves the moral compass for the group. They set the course that others follow and this direction must be a combination of strategic thinking and moral sense. A leader employs his or her inner compass to sense when a change of direction is needed or to keep the organization on the path to its shared goals (Wilson, 1996). Pardoni (2004) cites examples where leaders did not follow their moral compass thereby proving themselves ineffective in guiding their organizations to a proper destination. A superintendent in Maryland accepts a top honor and a $25,000 cash prize in a national recognition program from a textbook vendor. The award is only offered because the vendor is doing millions of dollars worth of business with the superintendent’s school district. Before accepting this reward, the superintendent made assumptions about himself and his personal benefit gained from the award. He obviously did not make the correct assumptions about the feelings of his peers, followers, supervisors, and the

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

LEADERSHIP

Department of Education because his decision was harshly criticized by the media and by other school districts. School board members in an Indiana district spent $4,400 of the money earmarked for public relations on an engraved Rolex watch for the district’s retiring superintendent. By the superintendent accepting this gift, the entire school district was scrutinized by the media and other school districts. Martha Stewart’s (Pardini, 2004) lying about her personal stock sale is another example of a weak moral compass. Martha Stewart assumed that her personal interest in avoiding jail time would be satisfied by lying to the courts. However, she failed to consider the consequences if she was caught and the public’s view of her actions. These leaders acted without regard for their own moral compass. They made improper assumptions that impacted themselves, their followers, and their organizations in a negative manner.

Moral development and outcomes Contrary to the above leaders, effective leaders are those who utilize an internal set of morals and principles to navigate the often-treacherous waters of business and set a course for success before making a decision (Covey, 2000). For effective leadership to be defined as leadership exercised for the benefit of the followers, not the enrichment of the leaders (Mackay, 2004) there clearly needs to be a highly developed sense of a morality which values followers as intrinsically (important in their own right) important rather than just instrumentally important for the organization. Leaders are responsible for the organization’s moral climate that, in effect, reflects the moral development of the leader and of the followers. Thompson (2004) views the moral compass as the impermeable boundary between the leader’s individual morals and the morals of the culture. This viewpoint acknowledges that leaders have some level of choice in how their culture will morally define them and how strong a role they will assume in reinforcing the morality of their culture. A moral compass enables a leader to engage in meaningful, authentic moral dialogue and discernment while remaining anchored in his or her unique moral traditions The leader’s personal moral development results from character formation through the practice of virtue in private as well as in public life. Ethical leadership manifests itself in three dimensions: a) the leader’s motives, b) the leader’s influence

strategies, and c) the leader’s character formation. Stated differently, the leader’s motives and influence strategies are the foundation of the leader’s character. In line with the above-mentioned three dimensions, the U.S. Military Academy, an institution dedicated to developing moral leaders, offers the following principles as a guideline to its students in maintaining a moral compass: •

Understand yourself improvement.

and

strive

for

self-



Develop tactical and technical proficiency.



Assume responsibility and be responsible for your actions.



Formulate timely and well-grounded decisions.



Be a role model.



Know your employees and monitor their welfare.



Maintain communications with your employees.



Be responsible for your employees.



Ensure employees understand their assignments.



Train your employees to function as a team.



Utilize your team to its highest capabilities.



Establish priorities.



Take the initiative (Mackay, 2004)

Through the use of morally appropriate influence, as well as strategies and tactics that are motivated and guided by moral intent, leaders can facilitate the growth of their own moral compass. Leaders set the tone for the moral caliber of their followers, and by their moral behavior, leaders can strengthen or corrode the moral fiber of their organizations. “A study of Fortune 500 Industrial and Fortune 500 Service companies indicates that an organization’s top managers and their ethical commitment guide how a firm’s programs are implemented” (Mendoca, 2001). For example, the leaders of Enron Corporation. had a well-developed code of ethics. Nevertheless, it was the leaders who guided the organization to fraud and embezzlement, due to their weak moral compasses and failure to make the right assumptions. The company’s code of ethics was certainly not enough to guide the leader’s moral compasses and that of the organization as a whole. Contrary to the Enron situation, effective leadership concerns itself with high moral ground such as Gandhi’s civil disobedience movement, Martin Luther King’s civil rights campaign, and Mandela’s fight to end apartheid. These movements and their leaders’

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

25

LEADERSHIP

determination exhibit a high moral outlook with a determination to achieve their goals and a constant renewal of their commitment to succeed (Safty, 2003).

courage to face risks and challenging situations; strives to overcome obstacles and act in a noble manner. Perseverance in the face of great challenges is an underlying quality of fortitude.

Virtuous moral leadership

TEMPERANCE – A leader who exhibits temperance sees the differences between self-indulgence and necessity. Through self-control, the leader avoids selfindulgence, and effectively allocates resources, effort, and time.

In the process of creating leaders, part of their moral compass consists of three virtues: hope, trust, and civility (Sergiovanni, 2005). The virtues, as they apply to moral compass can be explained as follows: HOPE – As previously mentioned, one part of a leader’s role is making assumptions as a component of the decision making process. Hope plays a large role in the assumptions that are made by the leader. Combined with hope is the concept of faith, which implies the leader’s commitment to his or her moral compass as well as the moral culture of his or her organization. TRUST – Leaders must establish a culture of trust in their organization, so that the followers believe in the path on which their leader is taking them to reach their common goals. CIVILITY – This virtue builds frameworks within the leaders and their followers that enable a common bond to be developed between their divergent views and interests. Civility draws leaders outward to embrace differences and to look upon society as a whole and see where their specific organization can fit in and assist in the betterment of the world in which they prosper. Civility is at the heart of building communities that bond people together, while creating bridges that connect them to other people and views by using their moral compass to guide the leaders and their organizations to a better future. According to Sergiovanni (2005), all of the above stated virtues develop a part of the leader’s moral compass. Mendoca (2001) on the other hand, presents four different virtues that are necessary in developing the moral compass of the leader: PRUDENCE – A prudent leader willingly accepts divergent stakeholder views as a source for new information, which may contribute to making better assessments and decisions. JUSTICE – A leader with a strong sense of justice seeks to give credit to others, which includes supporting others in exercising their rights and fulfilling their duties. The judicious leader considers the rights of all stakeholders and strives to achieve a balanced and fair approach in fulfilling his or her fiduciary responsibility. FORTITUDE – A leader with fortitude has the 26

According to various researchers through the practice of these virtues, leaders acquire the innerdirected and habitual strength of mind that will incorporate a strong moral compass and moral principles in their behavior and thereby form their character. A different viewpoint shown by a third researcher in this field, Sample (2002), provides seven “timeless” principles of leadership, which inevitably build the moral compass as well: 1. Leaders understand that casualties are unavoidable. The idea that there can always be a “win-win” proposition is simply untrue. Many of the best leaders succeed by establishing a moral line that they will not cross, while using a finely honed moral calculus to evaluate situations and set strategic direction of their organizations. 2. Leaders inspire followers to make a real commitment, often energizing people to take actions that are contrary to their natural inclinations. 3. Leaders need vision, but vision alone is not enough to overcome obstacles. Despite a strong vision, for leaders to be effective they cannot be overwhelmed in the face of challenges. 4. Leaders view issues from new perspectives, form innovative connections, and see solutions that others do not see. Unlike vision, perspective enables leaders to accept sound suggestions from followers that will prove to be beneficial to the overall success of the organization. 5. Leaders need laser-like internal instincts to keep them from stubbornly fostering an agenda not yet accepted by their followers. Nevertheless, this laser-like instinct will also ensure that as a leader they are not misdirected by the whimsical ideas of their followers. 6. Leaders see the many shades of gray in situations. Rather than categorizing life in rigid or absolute terms, effective leaders see the subtleties and take the time to consider all the facts in situations, prior to making a decision.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

LEADERSHIP

7. Leaders manage the un-pleasantries of leadership; they do not defer the difficult challenges confronting their organizations. It is through their ability to confront the tough issues that leaders can gain credibility in the eyes of their followers (Sample, 2002).

Development of ethical leaders Although the qualities that comprise moral leadership may be defined differently by various researchers, it is widely believed that the development of one’s moral compass begins in the home during childhood, where parents introduce youngsters to the principles of right and wrong actions as well as the concepts of fairness, decency, and compassion (Amen, 2004). As guidelines for the development of a moral compass in children Amen (2004) recommends: a) build a bond that will encourage your youngster to share your values, b) set an example by living the ethics that you preach, c) encourage discussions when sensitive issues and learning opportunities arise, and d) establish a set of written commandants to live by. Although these guidelines were intended for use by parents in the moral development of children, they would appear also to be sound principles for use by higher education institutions and corporate leadership development programs, as they seek to develop ethical leaders. “While some believe that ethics is better primarily determined by family and upbringing, the complexity of business our society necessitates a continuous approach” (McAlister, 2004, p. 55).

left to or religious ethics in learning

However, one seeks to approach the development of ethics in leaders, there is a clear need to improve the ethical development of leaders. The recent popularity of “boot camp” style leadership development programs, such as Outward Bound and other physically oriented group experiences, can be counter productive to the development of ethical and moral leaders (Center for Creative Leadership, 1999). Physical group activities, which often include military type missions, may teach teamwork but they also appear to foster the belief that leadership is a win-lose situation, where it is “us” against the enemy. A leadership development program of this nature does not engender a sense of respect, compassion, and understanding for one’s opponents, and it does little to promote the desire to explore alternative solutions. In contrast to the “boot camp” style of leadership training, there are programs such as the Center for Creative Leadership’s Looking Glass Company Simulation (1999). In this six-hour simulation,

leadership training participants take on various roles and face an array of business challenges. The participants are encouraged to listen, understand others’ concerns, voice their own concerns, and work with others to reach consensus-based agreements. Many of the principals in the recent corporate ethics scandals have been graduates of prestigious business schools; this has led higher education institutions to place an increasing emphasis on ethics education. For some institutions, this has meant the introduction of stand-alone classes in ethics, while other business schools have sought to infuse ethics into all aspects of their business courses. Researcher Carroll (2005) conducted a study of undergraduate business school students as part of an effort to determine the best approaches to teaching ethics in the classroom. A survey of students found professor-directed lectures, case studies, and discussions to be the tools most valued by students in helping them to develop ethical leadership skills. It is also interesting to note that students listed their ethics courses as second only to their management courses in importance to them. Another approach to teaching ethics in higher education was employed by Eller College of Management (BizEd, 2005). A survey at Eller indicated that 63% of the business school students admitted to cheating in the past year. Eller decided that to change the ethics of its students, it would need to revise the ethical culture of its own organization. Their multidimensional approach, which they labeled “e-tegrity” includes a student ethics oath, student honor board, etegrity Web site, installation of plagiarism-detecting software, and an annual ethics competition. Whatever approaches an institution employs, future business leaders need to gain skills that will help them to identify ethical issues, understand ethical standards in business, and develop the moral courage to make what are often difficult ethical decisions.

Conclusions In today’s business climate, which is still reeling from some of the most highly publicized cases of corporate fraud, the moral direction provided by leaders is essential for the long-term success of an organization (MacRae, 2002). Leaders must follow their inner moral compass and set an example of ethical leadership for their organizations. “Real leadership requires years of development and hard work” (George, 2006). Although this process may well begin in childhood, higher education institutions and leadership development programs can play a vital role in developing the moral compass of future leaders.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

27

LEADERSHIP

Further research into effective methods for developing ethical leaders is clearly merited.

Priscilla Pardini, Ethics in Superintendency in The School Administrator, September, 2004, The Association of American School Administrators http://www.aasa.org/publications

References

Wilson, I.H. (1996). The five compasses of strategic leadership. Strategy & Leadership, 24(4), 26-34.

Amen, D. (2004). How to install a moral compass. Men’s Health, 19(8), 199. BizEd (January/February 2005). Encouraging ethics at Eller, 38-39. Carroll, A.B. (January/February 2005). An ethical education. BizEd, 37-40. George, Bill (2006). Truly authentic leadership. U.S. News & World Report, 141(16), 52-54. London, M. (1999). Principled leadership and business diplomacy. Journal of Management Development, 18(2), 170191. MacRae, D. (2002). Wanted: A moral compass and a big stick. Business Week Online. Retrieved May 28, 2007 from http://web.ebscohost.com. Marturano, A. (2005). On being a moral agent: Teaching business leaders to think ethically. EBF, 20, 68. McAlister, D.T. (2004). Building ethical capacity in business schools. Marketing Education Review, 14(3), 55-62. Newman, R.J. (1997). Correcting the moral compass. U.S. News & World Report, 122(9), 12.

Society for Co-operative Studies Visit the society web page for detailed information www.co-opstudies.org Membership unites professionals, lay activists and academics interested in all aspects of co-operative studies Members receive the Journal of Co-operative Studies (now in its 115th issue) For further details contact– Richard Bickle, email: richardbickle;@cooptel.net or Journal Editor

28

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

GOVERNANCE

Dynamics and Tensions in Governance: evidence from Finnish co-operatives* Iiro Jussila, Juha-Matti Saksa & Janne Tienari

Abstract Questions related to corporate governance have become an integral part of management and organization studies. As the concept entails, the literature on corporate governance centres on the management and control of joint stock companies or corporations while other forms of economic organization have received less scholarly attention. Against this background, co-operatives offer a timely and relevant empirical context for studying governance. In this paper, we propose a framework for analyzing co-operative governance, and illustrate the dynamics and tensions involved with in-depth evidence from Finnish customer owned co-operatives. We outline problematic related to social construction of ownership and governance in organizations with multiple stakeholders and a dispersed pool of member-owners.

Key words Co-operatives, Governance, Ownership.

Introduction In recent decades, corporate governance has attracted extensive research in the field of organizations and management. Research on corporate governance has usually focused on the control of executive self-interest and the protection of shareholder interests in settings where ownership and control are separated. The emphasis has been on the efficacy of the various mechanisms available to protect shareholders from the self-interested actions of executives (e.g., Shleifer & Vishny, 1997). Recently, the conceptualization of corporate governance has evolved in unprecedented ways. Daily, Dalton, & Cannella (2003:371) define corporate governance as “the determination of broad uses to which organizational resources will be deployed”, including “the resolution of conflicts among the myriad participants in organizations”. This definition goes beyond the popular agency theory (e.g., Fama & Jensen, 1983) and employs, for example, resource dependency theory, stewardship theory, and power theory perspectives on governance.

Forms of economic organization that deviate from the joint stock company have also received scholarly attention. Ownership structure has been identified as an important determinant of corporate governance and business behaviour, and one of the studied alternative forms has been the co-operative organization in which ownership is often dispersed (e.g., Shleifer & Vishny, 1997; Pedersen, & Thomsen, 1997). Crucially, the various forms that governance takes in different legal and cultural contexts have also been specified. Aguilera and Jackson (2003) note that there are institutional factors that shape how actors’ interests are socially constructed (e.g., Berger & Luckmann, 1966; Durkheim, 1938/1894). Pedersen and Thomsen (2000), for example, propose that the identity of owners is an important determinant in corporate governance, as it has implications for objectives and uses of power. While some institutional factors and formal aspects of ownership have been recently considered in research on corporate governance, an institutional perspective on organization and other dimensions of ownership have received less attention. Daily et al’s. (2003) definition of organization in corporate governance comes close to this perspective, which is concerned with questions related to internal organizational dynamics determined by the institutional environment or organizational field (cf. Greenwood & Hinings, 1996). In recent decades, management scholars have also considered various dimensions of ownership (Tannenbaum, 1983; Pierce, Kostova, & Dirks, 2001; Rousseau & Shperling, 2003). These contribute to our understanding of organizational behaviour and organizational members’ expected rights and responsibilities, which, again, relates to new definitions of corporate governance (Aoki, 2000; Aguilera & Jackson, 2003). In this paper, we focus on the dynamics of governance in a co-operative context. We highlight the various aspects of ownership to understand how governance in co-operative organizations evolves in time. We offer data from Finnish co-operatives where ownership is highly dispersed at local level but relatively centralized at group level. We follow Daily et al. (2003), Pedersen & Thomsen (1999), Pierce et al. (2001), and Greenwood & Hinings (1996) in

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

29

GOVERNANCE

identifying particular elements of governance and ownership to sort out our evidence as we seek to understand how actors perceive the elements to have intertwined in time to produce particular organizational outcomes. In this way, we attempt to shed new light on tensions in co-operative governance.

Corporate governance The foci of interest in corporate governance is the arrangement where diversifying stock owners hire boards of directors, who in turn, hire managers to conduct, or monitor, the day-to-day activities in the firm in which the owner has financial interest (Walsh & Seward, 1990). Agency theory has been the dominant perspective in corporate governance research (e.g., Dalton, Daily, Certo, & Roengpitya, 2003; Shleifer & Vishny, 1997) as it has been found appropriate for conceptualizing the controlling and monitoring role of directors and board members (Daily et al. 2003). The foundational idea in the agency theory perspective on governance is that without control, managers are more likely to deviate from interests of shareholders (Fama & Jensen, 1983). Hence, the term corporate governance refers to the integrated set of internal and external controls that harmonize agency conflicts of interest resulting from the separation of ownership and control (Baysinger & Hoskisson, 1990; Williamson, 1984). The role of board members in corporate governance has been a widely discussed topic (e.g., Johnson, Daily, & Ellstrand, 1996; Baysinger & Hoskisson, 1990; Williamson, 1984). Agency theorists argue that the board, with its legal authority to hire, fire, and compensate top management, safeguards invested capital and, in consequence, occupy an important role in corporate governance (Williamson, 1984). Astute or opportunistic CEOs may influence the inclinations of the board, and thus set the premises for the board’s deliberations and decisions (Baysinger & Hoskisson, 1990). In addition to the control and monitoring role, directors and board members also occupy service and resource dependence roles (see e.g., Zahra and Pearce 1989 for a review of board roles). However, to explain these roles theoretical perspectives beyond agency theory are necessary (Johnson et al., 1996). Resource dependence theory provides a theoretical foundation for directors’ resource role (Daily et al. 2003). This perspective addresses contributions of board members as boundary spanners of the organization and its environment (Johnson et al., 1996; Zahra & Pearce, 1989). The appointment of representatives of interdependent organizations in boards provides access to essential resources and 30

secures those resources through linkages to the external environment (cf. Hillman, Cannella, & Paetzold, 2000; Pfeffer & Salancik, 1978). For example, “outsiders” who are members of other institutions can provide advice in specific topics, either in board meetings or in private communication with firm executives that may otherwise be more costly for the firm to secure. Daily et al. (2003) conclude that the provision of these resources enhances organizational functioning, firm performance, success and survival. There are also theoretical approaches to governance that have their roots in sociology and psychology. The stewardship theory, which provides a theoretical foundation for understanding the directors’ service role, defines situations in which managers are not motivated by individual goals, but rather are “stewards” whose motives are aligned with the objectives of their principals. The foundational idea of this perspective is that stewards will not substitute or trade self-serving behaviours for co-operative behaviours (Daily et al. 2003; Davis, Schoorman, & Donaldson, 1997). However, the stewardship perspective does not adopt a view of executives and directors as altruistic. As Lane, Cannella, and Lubatkin (1998) point out, stewardship theorists simply recognize that there are many situations in which executives conclude that serving principals’ interests also serves their own. Davis et al. (1997) maintain that placing higher value on cooperation than defection – and behaving accordingly – can be considered rational. Also, managerial efficiency and reputation are often found interwoven with the performance of the firm (Baysinger & Hoskisson, 1990). Hence, in order to protect their reputation as expert decision makers, executives and directors are inclined to behave in a manner that would maximize financial performance indicators, including shareholder returns (Daily et al. 2003). Researchers have also applied a power perspective to corporate governance. The power relationship between the CEOs and board of directors has been of particular interest, for example, to Finkelstein & D’Aveni (1994) and Daily et al. (2003). Although the board has formal power over management, in fact, it is the CEO that often dominates the board. This is suggested to be a consequence of the board member selection, over which CEOs may have determining influence (Mizruchi, 1983). The timing of a director’s appointment to the board may also have impact on the power relationship between the CEO and board members, because members appointed during the tenure of the current CEO may feel beholden to him and may be less likely to challenge him (Wade, O’Reilly, & Chandratat, 1990).

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

GOVERNANCE

Governance of co-operatives Co-operatives are owned by their members. In principle, they are democratically governed economic organizations in the vein of “one-man-one-vote”. Membership includes equal share of ownership and voice in governance. In principle, a co-operative is open for all who wish to benefit from its services. This foundational principle is grounded on stakeholder theory, which, according to Freeman, Wicks, & Parmar (2004:364), in its core declares that “economic value is created by people who voluntarily come together and co-operate to improve everyone’s circumstance”. What distinguishes co-operative membership from corporate ownership is that the members are noninvestors. They seek primarily other types of benefits from the firm than maximum value to their financial investment, which in co-operatives is typically relatively small (e.g., Skurnik & Vihriälä, 1999). It must, however, be born in mind that the significance of the differences between co-operative membership and corporate ownership may differ between societal (or cultural) contexts. Pedersen and Thomsen (1997) note that in European settings shareholders are traditionally considered to be one of a number of stakeholder groups and corporate goals may at times be inconsistent with shareholder wealth maximization. There are also certain features in the governance of cooperatives that may differ from corporations (Hansman, 1999). First, an important determinant of governance of co-operatives is the poor liquidity of ownership. According to Pedersen and Thomsen (1997), members of a co-operative, who cannot resell shares, are likely to oppose investment projects that stretch beyond their ownership period. Second, owners have less sources of information, such as the stock market, in the cooperative context (Hansman, 1999). Further, some features of governance are accentuated in co-operatives. From a principal-agent perspective, for example, a large number of small owners are likely to face some difficulty in coordinating their efforts to exert control over management (Wade et al. 1990). Small owners may also have little incentive to monitor management behaviour (Daily et al. 2003). However, according to Hansman (1999), even large consumer co-operatives in which ownership is highly dispersed and a strong separation between ownership and control is exhibited are commonly more closely controlled by their members than are investor owned firms. In general, the need for close control can be understood as one of the reasons why co-operatives, unlike corporations, are likely to thrive only where such relationship is possible (Hansman, 1999).

However, this may again vary between contexts. For example, members of Finnish co-operatives have been considered as rather passive owners (Tainio, 1999). Finally, owners of corporations and co-operatives may have inherently different views of other stakeholders. This may have influence on how executives behave in relation to the stakeholders. Whereas capital markets discipline corporate executives who ignore shareholders in order to benefit other stakeholders (Holmstrom & Kaplan, 2001), co-operative owners may look approvingly at executives who are attentive to regional and local stakeholders’ interests. This is due to the fact that “seats” on supervisory boards of cooperatives may in practice be reserved for representatives of particular local constituencies (Hansman, 1999; Tainio, 1999). Executives in cooperatives may also interact more with stakeholders such as customers and employees, while corporate top executives’ work is more directed towards interaction with investors and their representatives. Through interaction, values, preferences and objectives of particular stakeholders may influence the goals and decisions of organizational actors (cf. Thomsen & Pedersen, 2000; Thomsen, 2004).

Dynamics, tensions and the question of ownership Building on institutional theory (e.g., DiMaggio & Powell, 1983; Meyer & Rowan, 1977; Selznick, 1957), Greenwood and Hinings (1996) have conceptualized organizations as heterogeneous entities composed of functionally differentiated groups pursuing goals and promoting interests. For example, the way organizations “respond” to evolutionary and revolutionary change is considered a function of their internal dynamics. Evolutionary change is something that occurs gradually and relatively slowly (Pettigrew, 1985), whereas revolutionary change takes place swiftly and affects virtually all parts of the organization simultaneously (Tushman & Romanelli, 1985). As the various groups pursue their potentially conflicting goals and promote their interests they may also relate differently to organizational change. Institutional theorists (e.g., Meyer et al., 1993; Zucker, 1983; Meyer & Rowan, 1977) argue that regularized organizational behaviours are the product of ideas, values, and beliefs that originate in the institutional context (i.e., intra-organizational dynamics are in interaction with contextual dynamics). To survive organizations must accommodate institutional expectations, even if they are apparently inconsistent with efficiency or efficient task performance

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

31

GOVERNANCE

expectations. In brief, organizational behaviours are in part products of both competitive and contextual institutional pressures (cf. Greenwood & Hinings, 1996). In pursuit of understanding dynamics and tensions of ownership and governance in organizations, the concept of ownership needs to be broadened. From the traditional perspective, ownership is about the formal right to control the firm and appropriate the residual earnings. Thus, ownership and related rights are derived from the societal legal system (cf. Rousseau & Shperling, 2003; Grunebaum, 1987). However, there are aspects that go beyond the traditional view. Ownership norms are implicit in the minds, language, and behaviours of individuals. These culturally grounded perceptions of ownership may not totally coincide with explicit legalistic conceptions (Rudmin & Berry, 1987). Also the psychology of ownership (e.g., Heider, 1958) has emerged as a significant area of inquiry in understanding behaviours and attitudes of organizational actors in general (Pierce et al. 2001) and ownership-related decisions by individuals in particular (cf. Beggan & Brown, 1994). On the individual level, ownership can in a psychological perspective be conceptualized as an association between an object and a person in the mind of a person (Heider, 1958), and organization (i.e., a physical, social, or cultural part of it) becomes a possible object of such association (cf. Jussila & Puumalainen, 2005; Pierce et al. 2001). Psychological ownership, that is, the individual or collective feeling that an object is “mine”, “ours” or “part of self ” (e.g., Van Dyne & Pierce, 2004; Pierce & Rodgers, 2004) may under some conditions have effects that create tensions in organizations (cf. Dirks et al., 1996). For example, organizational members may want to retain exclusive control over a target or managers may resist interventions that empower others, because they feel a high degree of ownership toward (the management of) a particular unit (Pierce et al., 2001). Psychological ownership may also have influence on how organizational members orientate to organizational changes. Dirks et al. (1996) suggest that psychological ownership leads to positive or negative orientations toward change, contingent on the type of change involved. In general, the orientation is likely to be positive when the change is self-initiated, evolutionary or additive and the orientation is likely to be negative when the change is imposed, revolutionary, or subtractive. On the interpersonal level, individual and collective perceptions of ownership and the rights and 32

responsibilities associated with it are shaped and interpreted through social reality in each context (Dittmar, 1992; cf. Berger and Luckmann, 1966). “Organizational” perceptions of ownership may be shaped, for example, by manifestations of psychological ownership (e.g., This is MINE!). This means that subjectively perceived ownership may become part of social reality through language. In the eyes of a third party, also the presence of association between a person and an object may be sufficient enough to influence the perceived strength of ownership, and the perception of who has the right to use the target, benefit of it and to exercise control over it. Beggan and Brown (1994) note that in contexts where people lack a strong justification for decisions, they often use these kinds of cues. In all, dynamics of governance seem to arise from both competitive and institutional pressures and various socially shared and argued perceptions of ownership. In co-operatives, these are often transferred to organizational decision making through the supervisory board, which occupies several roles in governance.

Context, data and method A number of Finnish co-operative organizations have to the apparent surprise of some experts - managed to maintain a relatively successful trajectory of performance throughout recent years (cf. Skurnik, 2005). Our focus is on the S Group (retail sector) and the Finnish OP Bank Group. Both organizations are owned by their customers and staff. At least in principle these co-operatives demonstrate a relatively decentralized mode of governance. The S Group consists of 22 independent regional cooperative societies as well as a central organization SOK and its subsidiaries, owned by the regional co-ops. The 22 co-operatives, in turn, are owned by their members. In total, the co-operatives in the S Group have about 1,5 million customer owners (the total population of Finland is 5,2 million). Businesses in the S Group include food and groceries, specialty goods, hotels and restaurants, hardware and agriculture, automobiles, service stations, and welfare services. In its most important fields of business, food and groceries and specialty goods, the domestic market share of the group is around 36 percent (recent acquisition of SPAR Finland is not included). The group declares its purpose as to provide services and benefits for committed customer-owners. The central organization, which is owned by the 22 independently run and governed co-operatives, provides advice,

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

GOVERNANCE

support and service activities for regional societies. (www.s-kanava.net: accessed May 12th 2006) The OP Bank Group consists of 236 independent banks (local and regional) and a statutory Central Cooperative. The co-operative banks are owned and governed by local members. In total, the local and regional co-operatives have about 1,1 million member owners. The business of the co-operative banks includes private, corporate and community banking. The domestic market share of the group is around 31 percent in savings and loans. Due to recent acquisition of Pohjola, OP Bank Group has also become a major player on the field of insurance. The central organization (OPK), which is owned by the local and regional banks, provides advice, technical support and banking services, including Central Bank (OKO) services for its owner banks. OPK also has statutory responsibility to supervise and control the banks. (www.op.fi: accessed May 12th 2006) The qualitative data for our study includes company documents and archival material as well as in-depth interviews carried out in spring 2004. First, we interviewed a total of three Finnish experts on the concept of “co-operative organization”; definitions, history, present and future. Second, we analyzed an extensive amount of archival material on both the S Group and the OP Bank Group. This includes nonscientific published studies, periodicals for personnel from year 1970 to 2004 and annual reports. Third, we carried out a total of eleven in-depth interviews among elected executives, managers and supervisory board members both in regional co-operatives and at the headquarters in both organizations. In these interviews, we used the “snow-balling” principle (e.g., Greenwood, Suddaby, & Hinings, 2002) where new interviewees were selected based on earlier interviewees’ recommendations. In sum, we have relied on triangulation of qualitative data in our study (cf. Alasuutari, 1995). The data was first studied systematically to gain understanding of the research context and to form a preliminary understanding of corporate governance in co-operatives. Next, the data was organized by themes, and analyzed in detail by the corresponding author and one of the co-authors. Much of the literature we build on in this study is psychology-based and quantitative, and implies correlations among “variables”. However, in this paper, our intention is not to look for psychological mechanisms or study psychological reality of individual organizational actors. Rather, we interpret how organizational actors talk about elements of ownership, governance, and institutional factors and

provide accounts of how these have intertwined in time to produce particular organizational outcomes. These accounts are triangulated with our extensive archival material to gain in-depth understanding on the topic. In this way, we are also able to provide a rich description of different versions of social reality related to the phenomenon we are focused on.

Evidence from Finnish co-operatives Co-operative ownership is usually dispersed. This is well illustrated by the fact that Finnish local or regional co-operative societies may have thousands or tens of thousands of owners. Ownership is, however, more centralized at Group level in our case organizations as the central units are owned by 22 co-operatives in the S Group and 236 co-operatives in the OP Bank Group. In their accounts, the experts interviewed seemed to be consistent with academic reflections on the topic of co-operative ownership (e.g., Tainio, 1999; Skurnik & Vihriälä, 1999), which is perceived to differ from corporate ownership not only in the amount of investment but also by a more intimate relationship to the target of ownership. They also referred to feelings of ownership, when speaking of the differences between co-operative and corporate ownership: ”Corporate ownership is purely about investment that is expected to result in an increase of value… co-operative ownership is about a feeling of ownership for the organization along with possibilities to influence. It’s also about the role of the co-operative developing your community… it feels more intimate.” Ownership and customership are interwoven in customer-owned co-operatives (where, for example, an employee may simultaneously be a customer and owner). This means that whereas corporate owners are investors that aim to benefit from increase in the value of their shares, co-operative owners are non-investors that get their benefits by active participation as customers. That is, the return of surplus is bound to the use of services provided by the co-operative. As a retired regional co-operative executive put it: “In co-operatives, the members get the benefits of ownership by being active customers of their cooperatives. I am a master concentrator myself (laughter); I always see to it that my family uses co-operative products and services whenever possible. This way we can get the best possible value of co-operative ownership as a household” Although the increase of share value is not considered a significant goal of co-operative activity,

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

33

GOVERNANCE

some executives of regional S Group co-operatives spoke for increasing the return of surplus to members. Some executives of Co-operative Banks viewed the wealth and welfare of members as the ultimate mission of co-operative banking: “I define ownership and the mission of cooperative banks as to help members gain wealth and succeed… customers must have a feeling that they succeed with the help of the co-operative bank, that is, by using the services it provides.” While benefits for members, through providing locally consumed services, were presented as the primary goal of co-operatives, also other stakeholders were considered important. Some aims of co-operative activity in business were pointed out to lie on the societal and regional level. For example, co-operatives, as an alternative to international firms with investor owners, were considered to play an important role as defenders of national, regional, and local ownership in general. As the following representations illustrate: “The locally ‘own’ co-operative bank is more than just a profit maximization organization; it

is an institution that holds together the local community” “In certain areas independence has been highly valued; holding on to ‘own’ organizations [cooperative banks] has been considered extremely important” “I believe that in relation to the global world the locality of Co-operative Bank is considered important in nationalistic perspective” The nationalistic element in co-operative business is noteworthy (cf. Skurnik, 2005); as co-operative ownership is locally based and controlled. In our data, the regional and local dimensions complicate this notion as co-operatives are also presented to participate in developing the regions and towns they are located in, and providing it economic and financial support. The term “owner” was not actively used in Finnish co-operatives before the late 1980s. This term was introduced alongside “member” in the co-operatives studied through terms such as “customer owner” (S Group) and “owner member” (OP Bank Group) during the late 1980s and early 1990s. Around the same time, scholars and practitioners of co-operative organization began to debate the development of ownership and governance in Finnish co-operatives. Our interviewees’ accounts of co-operative members’ activity as owners are in line with academic work, according to which 34

Finnish owners were considered passive (Tainio, 1999). However, ownership and governance were also argued to have revived as an outcome of recent public debate in Finland (cf. Skurnik, 2005). Whereas in corporations the shareholders may have different voting rights and, thus, voice in governance, in co-operatives each owner has an equal share (and one vote) that cannot be resold. In the accounts of our interviewees, this principally democratic system is valued although it is occasionally criticized: “If there are 30000 members and you are one of them, you have no opportunities whatsoever to control the co-operative.” Beggan and Brown (1994) imply that when legal ownership is a minor determinant, other dimensions of ownership come to play a major role in decision making. In our interviewees’ accounts, the voice of individual owners in governing consumer cooperatives is restricted. The owners’ direct interaction and social influence were suggested to be significant in justifying decisions, concerning both operational and strategic issues. Whereas in corporate context the stock market is considered a significant source of information and mechanism of governance (Pedersen & Thomsen, 1997), co-operative organizations lack such a mechanism (cf. Skurnik, 2005). However, the market is considered to control consumer co-operatives as well. In co-operative context, this refers to owners’ behaviour as consumers. Owners are represented in the governance of co-operatives as members of representative bodies and supervisory boards and, at times, on the boards. Such choices are outcomes of democratic process. First, owners elect members to representative bodies, which assemble the supervisory board, which, in turn, selects individual board members. In our interviews, the objective of this system is presented as threefold: 1) it is considered democratic, 2) it is perceived to contribute to the coherence of the co-operative by equal voice, and 3) it is viewed to create stability. Due to the system, hostile takeovers are not possible in co-operatives. Daily et al. (2003) discuss four different perspectives on board roles in governance: agency, resource dependency, steward and power. In the context of our study, all governing organs of owners may take such roles: the representatives, the supervisory board and the board. In the agency perspective (Williamson, 1984), the role of the board is to safeguard invested capital. In the co-operative context, too, the significance of this role is crucial. In the accounts of our

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

GOVERNANCE

interviewees, some (former) executives of cooperatives were described as opportunistic and astute (cf. Baysinger and Hoskisson, 1990). Some major failures were described, and some explanations were provided. For example, during 1980s some regional Cooperative Bank executives took unbearable risks to seek high profits and to pursue “personal ambitions”. The governance system in the bank group was ineffective and lacked necessary control mechanisms. The boards were often doomed to fail due to their incompetence and lack of accurate knowledge of the field during a time when institutional pressures dramatically transformed the business environment. In Johnson et al. (1996), board roles have been considered from the resource dependency perspective. This addresses board members’ contributions as boundary spanners of the organization and its environment. Our interviewees emphasized the role of the supervisory board in this role. Many perceived board members to be a great asset in achieving strategically important knowledge from different businesses and fields. This was presented to be an outcome of the composition of the board as the supervisory board often comprises of virtually all major stakeholders of each region. For example, in S Group co-operatives board members often hold significant positions in the private or public sectors. In the S Group, the interviewees gave a number of examples of situations where individuals involved in local and regional politics attempt to lobby for the co-operative over its competitors. However, in addition to major stakeholders, also laymen may play an active role in cooperative governing organs. This means that local or regional resources are widely employed. A top manager in an S Group co-operative maintained: “The role of all members in all governing organs has been emphasized to make them monitor the environment, to ‘act like radar’, so to speak. They have also been brought to the strategy work of our organization” According to the stewardship theory perspective, there is no agency conflict when managers’ and owners’ interests are aligned (Daily et al. 2003). This alignment is perceived to be a significant characteristic of many Finnish co-operatives. At least two issues account for this. First, the salary of many CEOs of regional co-operatives is bound to firm performance. Second, in the stakeholders’ view, co-operative CEOs have become highly respected due to their track record. The interest of the CEOs is to maintain such a reputation, which leads to behaviours in line with owners interests. Trust and a long term perspective on

business may be created in this way. For example, in the S Group, regional CEOs are monitored by owners and other stakeholders. Their managerial efficiency and competence is judged by in-group measures that are considered to be in line with the owners’ interests. In the power perspective, CEOs are often considered to dominate the board although it has formal power over the CEO (Daily et al. 2003). In co-operatives this is reflected in retiring CEOs’ traditional major role in appointing their successors and, at times, even board members (cf. Miruchi, 1983). However, CEOs are, in practice, hired and fired by supervisory boards. If the business runs successfully, “that is all they have to do”, as one of our interviewees put it. When the performance deteriorates, the CEOs power wavers. As the discussion above entails, several sources of tensions are built in the governance of co-operatives. Greenwood and Hinings (1996) conceptualize organizations as heterogeneous entities composed of functionally differentiated groups pursuing particular goals and promoting interests. A constant tension between the goals and interests of individual regional co-operatives and the group level is a crucial characteristic of our case organizations: “Because the OP Bank Group consists of several independent business units, that is, the cooperative banks, implementation of group level strategy to all banks has been challenging, to say the least.” “From whose perspective should we look at maximization of firm value - the owners, customers, employees, other stakeholders or some other interest groups? Each interest group aims to maximize value from their perspective…” Thus, it seems that tensions in consumer cooperative groups can be derived from the organization structure, which reflects the different interests of stakeholders. Regional and local contextual dynamics seem to create tensions in the group level. For example, some influential individuals or groups may consider their own mission more important than group level goals. Different owner identities have been emphasized (cf. Thomsen, 2004) as basis for group level tensions. In the co-operatives studied, each regional co-operative has its own values and missions that may, in fact, be somewhat inconsistent with other co-operatives in the group. Some of our interviewees discussed gradual restructuring in the organization and the possibility of mergers between regional co-operatives due to competitive and institutional pressures:

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

35

GOVERNANCE

“The municipality structure is creaking; consolidations of municipalities occur all the time and co-operation is needed… how quickly do co-operatives follow these changes?” “Each region has its own values and beliefs and their own dialect. There is no point in merging organizations if regional identities are mixed. As you know, for example, people here are very different from the people in the neighbouring region” “When you think of a situation in which executives and strategic decision making are located at the headquarters in Helsinki and the business is located approximately 500km away [name of the place removed], there is no way for people at the headquarters to understand the way customers think or what they expect.” These kinds of comments are significant as they pinpoint local and regional identities as a crucial feature in the governance of co-operative organizations. Above, we discussed co-operatives as a significant alternative to international firms with investor owners. The challenge in co-operatives is, however, to coordinate local and regional interests and preferences and to meet them competitively at the national level. Our interviewees discussed several kinds of institutional pressures related to group level strategies and negotiating organizational structure. In line with Pedersen and Thomsen (1997), the governing organs of local and regional co-operatives were presented to be likely to oppose investments that stretch beyond the perceived time horizon of the members’ ownership. In brief, local and regional organizations of the OP Bank Group were thought to be more likely to accommodate contextual institutional expectations than to react to competitive pressures or to be consistent with group level expectations for efficiency. Some interviewees seemed to perceive that, for example, reluctance to merge with other co-operatives could be explained by stakeholders’ feelings of shared ownership for their co-operative (cf. Van dyne & Pierce, 2004; Pierce et al. 2001): “As we did not begin to merge the [S Group] cooperatives early enough, what happened was that members, the owners of the co-operative, began to defend their own, the co-operative, vigorously and to say that they’ll manage. They fought for their little co-operative until all the money was gone and a merger was the only option.” “In many locations, the societal change has led to a situation where the local co-operative bank is 36

for the local citizens the only thing that is truly theirs. When the group tries to negotiate mergers, the owners’ representatives in the governing body make their ownership explicit by saying: ‘This is our co-operative, we make our own decisions and nobody will tell us how to run this bank’.” In Pierce et al.’s (2001) theory of psychological ownership in organizations, feelings of ownership are proposed to lead to resistance to change, when the change is imposed, revolutionary, or subtractive. Dirks et al. (1996) suggest that individuals orientate negatively toward imposed change on the target of their ownership. Accounts by our interviewees seem to be consistent with these claims. In principle, co-operative managers are expected to conduct or monitor day-to-day activities in the cooperative while owners’ representatives (often laymen) are expected to think through strategic guidelines and control the management (cf. Walsh and Seward, 1990). Their roles and relationship are, in practice, ambiguous. In our material, this was pointed out as a significant source of tensions in co-operative governance. For example, according to an S Group regional co-operative executive, the regulations in the group indicate that the CEO is always the chairman of the board, both in regional co-operative societies and SOK, the central unit. Whereas the supervisory board can be considered a significant resource for the co-operative, the knowledge the board members possess and the connections they have to the organization’s business environment are also perceived as important sources of power. Despite the principally democratic governance, the largest stakeholder groups are not always considered effective or powerful as owners, even though they outnumber other stakeholders. Often it is not the number of people you have behind particular objectives that counts; rather, it is crucial who you have on your side: “In co-operative governance the voice of the owner is small, although the owners’ governing organs do have control over many strategic issues. Yet, especially in local settings, the power is often based on socio- economic position…” At group level, the ownership is highly centralized, especially in the S Group. The 22 regional cooperatives own the central unit, which also means that the regional co-operatives have power over it. According to our interviewees, conflicts of interests between regional co-operatives and central units may result in public debate and subsequent changes in top

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

GOVERNANCE

management. In the end, the voice of regional CEOs and supervisory boards may overrun the voice of the central unit CEO. In the OP Bank Group, in which ownership of the central unit is less centralized (236 member cooperatives), conflicts between the group level and regional (or local) interests have led to different outcomes. Often the diversified interests have been between particular co-operatives rather than between central and regional units. This is despite the fact that in some accounts the central unit was represented as a “power-seeking organization by nature”. In 1997, tensions resulted in the members of 44 (mostly) local co-operative banks opting to break away from the Group. Today, co-operative bank CEOs generally consider the balance between group level unity and local independence as the most important question in the governance of the group.

Discussion In this paper, we have emphasized different aspects of ownership (cf. Pierce et al., 2001) and the neoinstitutional perspective on organization (cf. Greenwood & Hinings, 1996) to understand governance in co-operative context. Grounding our study on in-depth evidence from large Finnish consumer co-operatives, which operate with an organization that consists of local and regional cooperatives and a central unit, we have analyzed dynamics and tensions in co-operative governance involving owners, their elected representatives, as well as, executives and managers. Our evidence is consistent with earlier studies on corporate governance (e.g., Daily et al. 2003; Thomsen, 2004) and governance of co-operatives (e.g., Pedersen & Thomsen, 1997; Tainio, 1999) in suggesting that various board roles and contextual differences are important in understanding governance. However, our study also brings some new insights to research on co-operative governance, as we shed light on the dynamics and tensions of governance arising from different dimensions of ownership. We also consider competitive pressures and institutional dynamics of governance in co-operative context. First, our study illuminates the broad and complex nature of ownership in the governance of cooperatives. From an economic-institutional perspective, co-operative ownership is highly dispersed and stable. However, from individual and interpersonal perspectives ownership is more dynamic and unstable. Psychological ownership is a multidisciplinary concept developed by Pierce et al.

(2001) to understand employees’ and managers’ behaviours and decisions in organizations. This concept seems particularly suitable to understanding co-operatives in which the dispersed ownership leaves room for social manoeuvring in governance. Such manoeuvring is evident in members’ interaction with co-operative management, and it is based on members’ psychological ties with the co-operative, often with a regional or local dimension. These considerations are important as they often seem to justify decisions made in co-operative organizations. Second, nationalistic, regional and local elements in contemporary co-operative business explicate a crucial dimension in governance. From a national perspective, co-operatives, which are owned and governed by regional and local stakeholders, may provide stability and security under the uncertainties that globalization brings to national or regional economies (cf. Skurnik, 2005). In an organization that consists of local and regional co-operatives and a central (national) unit, however, seeds of tension and conflict are simultaneously sown on two levels of governance. On the group level, tensions and conflicts seem to arise from organization structure as the owners of the central unit, that is, the regional and local cooperatives, may have diverging values and objectives in the same way as individual members and stakeholders within regional and local co-operatives. In relation to the second point in particular, our results are as yet tentative. More research is needed in the future. We have grounded our study on triangulation of qualitative data. This should be extended by statistical analysis of quantitative data when further exploring dynamics and tensions pinpointed in the present study. This could enhance our understanding of the ways in which managers’ and co-operative members’ representatives’ feelings and perceptions of ownership relate to governance and governance-related attitudes and behaviours in cooperative context and, in turn, how these link with the apparent role of co-operatives as defenders of local ownership in the uncertainties created by quartile capitalism and the mobility of investor owners. Surveys could also provide us with more knowledge of institutional pressures and dynamics influencing governance of co-operatives.

*This paper is a developed version of the paper presented to the 18th Scandinavian Academy of Management (NFF) Meeting, Aarhus School of Business, Denmark, August 18-20, 2005. We acknowledge the comments given to us by Ph.D. Panu Kalmi.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

37

GOVERNANCE

References Books Alasuutari, P. (1995) Researching Culture: Qualitative Method and Cultural Studies. London: Sage

DiMaggio, P & Powell, W. (1983) The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields, American Sociological Review, 48, 147 - 160

Aoki, M. (2000) Information, Corporate Governance, and institutional Diversity: Competitiveness in Japan, the USA, and the Transnational Economies. Oxford, Oxford University Press

Dirks, K. T. & Cummings, L. L. & Pierce, J. L. (1996) Psychological Ownership in Organizations: Conditions Under Which Individuals Promote and Resist Change, Research in Organizational Change and Development, Vol. 9, 1 – 23.

Berger, P. L. & Luckmann T. (1966) The Social Construction of Reality: A Treatise on the Sociology of Knowledge. Garden City, New York: Anchor Books.

Fama, E. & Jensen, M. (1983) Separation of Ownership and Control, Journal of Law and Economics, 15, No. 1. Jan, 29 – 39.

Dittmar, H. (1992) The Social Psychology of Material Possessions: To Have Is to Be, New York, St. Martin’s Press

Finkelstein, S. & D’Aveni, R.A. (1994) CEO Duality as a Double-Edged Sword: How Boards of Directors Balance Entrenchment Avoidance and Unity of Command, Academy of Management Journal, Oct. 37, 5, 1079 – 1108.

Durkheim, E. (1894/1938) The Rules of Sociological Method, The Free Press, New York, USA Grunebaum, J.O. (1987) Private ownership. London and New York, Routledge & Kegan Paul. Heider, F. (1958) The Psychology of Interpersonal Relations, New York, Wiley Pfeffer, J. & Salancik, G. R. (1978) The External Control of Organizations: A Resource-dependence Perspective. New York, Harper & Row Pettigrew, A. (1985) The Awakening Giant. Oxford, England: Basil Blackwell Selznick, P. (1957) Leadership in Administration. A Sociological Interpretation, Berkeley: University of California Press. Journals

Freeman, R.E. & Wicks, A. C. & Parmar, B. (2004) Stakeholder Theory and “The Corporate Objective Revisited”, Organization Science, Vol. 15, No. 3, 354 – 369. Greenwood, R. & Suddaby, R. & Hinings, C. (2002) Theorizing Change: The Role of Professional Associations in the Transformation of Institutionalized Fields, Academy of Management Journal, Vol. 45, 1, 58 - 80 Greenwood, R. & Hinings, C.R. (1996) Understanding Radical Organizational Change: Bringing Together the Old and the New Institutionalism, Academy of Management Review, Oct. 1996, 21, 4, 1022 – 1054. Hansmann, H. (1999) Cooperative Firms in Theory and Practice, The Finnish Journal of Business Economics, 4, 387 – 403.

Aguilera, R.V. & Jackson, G. (2003) The Cross-National Diversity of Corporate Governance: Dimensions and Determinants. Academy of Management Review, 28, 3, 447 – 465.

Hillman, A & Cannella, A. A. & Paetzold, R. (2000) The Resource Dependence Role of Corporate Directors: Strategic Adaptation of Board Composition in Response to Environmental Change. Journal of Management Studies, 37, 235 – 256.

Baysinger, B & Hoskisson, R. (1990) The Composition of Boards of Directors and Strategic Control: Effects on Corporate Strategy, Academy of Management Review, Vol. 15, No. 1, 72 – 87.

Holmström, B. & Kaplan, S. N. (2001) Corporate Governance and Merger Activity in the United States: Making Sense of the 1980s and 1990s, Journal of Economic Perspectives, 15, 2, 121 – 144.

Beggan, J. K. & Brown, E. M. (1994) Association as a Psychological Justification for Ownership, The Journal of Psychology, 128(4), 365 – 380.

Johnson, J. L. & Daily, C. M. & Ellstrand, A. E. (1996) Boards of Directors: A Review and Research Agenda, Journal of Management, Vol. 22, No. 3. 409 – 438.

Daily, C.M., Dalton, D.R.; Canella, A.A. Jr. (2003). Corporate Governance: Decades of Dialogue and Data. Academy of Management Review, 28, 3, 371-382.

Lane, P. J. & Cannella, A. A. & Lubatkin, M. H. (1998) Agency Problems as Antecedents to Unrelated Mergers and Diversification: Amihud and Lev Reconsidered, Strategic Management Journal, Summer, 19, 6, 555 – 578.

Dalton, D. R. & Daily, C. M. & Certo, S. T. & Roengpitya, R (2003) Meta-analyses of Financial Performance and Equity: Fusion or Confusion? Academy of Management Journal, 46, 13 – 26. Davis, J. H. & Schoorman, F. D. & Donaldson, L. (1997) Toward a Stewardship Theory of Management, Academy of Management Review, 22, 20 – 47.

38

Meyer, J. W., Scott, W. R., & Deal, T. (1983) Institutional and technical sources of organizational structure. In H. D. Stein (Ed.), Organization and the human services:151-178. Philadelphia: Temple University Press. Mizruchi, M. S. (1983) Who Controls Whom? An Examination of the Relationship Between Management and

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

GOVERNANCE

Boards of Directors in Large American Corporations, Academy of Management Review, 8, 426 – 435. Pedersen, T. & Thomsen, S. (1999). Business Systems and Corporate Governance. International Studies of Management & Organizations, 29, 2, 43-59. Pedersen, T. & Thomsen, S. (1997) European Patterns of Corporate Ownership: A Twelve-Country Study, Journal of International Business Studies, 4, 1997, 759 – 778. Pierce, J. & Rodgers, L. (2004) The Psychology of Ownership and Worker-Owner Productivity, Group and Organization Management, 29, 5, 588 - 613 Pierce, J. L. & Kostova, T & Dirks, K. T. (2001) Toward a Theory of Psychological Ownership in Organizations, Academy of Management Review, Apr, 26, 2, 298 – 310. Rudmin, F. W. & Berry, J. W. (1987) Semantics of Ownership: A Free-Recall Study of Property, The Psychological Record, 37, 257 – 268. Russeau, D. M. & Shperling, Z. (2003) Process of the Action: Ownership and the Changing Employment Relationship, Academy of Management Review, Vol. 28, No. 4, 533 – 570.

Administrative Science Quarterly, 35, 587 – 603. Walsh, J. P. & Seward, J. K. (1990) On the Efficiency of Internal and External Corporate Control Mechanisms, The Academy of Management Review, Jul, 15,3, 421 – 458. Williamson, O.E. (1984) Corporate Governance, Yale Law Journal, 93, 1197 – 1230. Zahra, S. A & Pearce, J. A. (1989) Boards of Directors and Corporate Financial Performance: A Review and Integrative Model, Journal of Management, Vol. 1. No. 2. 291 – 334. Miscellaneous OP Bank Group (2004) OP Bank Group, Annual Report 2004, Libris Oy, Helsinki Oeconomicae Helsingiensis A-251. [The Transformation of the Finnish Business System: From a Closed regulated Economy into a Bipolar Globalized Economy.] Jussila, I. & Puumalainen, K. (2005). Psychological ownership in organizations: predictors of ownership feelings for physical, social and cultural dimensions, Published in proceedings of Midwest Academy of Management –conference, Chicago, March 2005.

Shleifer, A. & Vishny, R (1997) A Survey of Corporate Governance, The Journal of Finance, 2, June, 737 – 783. Skurnik, S. (2005) Suomalaisen talousmallin murros: suljetusta sääntelytaloudesta kaksinapaiseen globaalitalouteen. Helsinki School of Economics, Acta Universitatis Skurnik, S. & Vihriälä, V. (1999) Role of Cooperative Entrepreneurship in the Modern Market Environment: Introduction and Summary, The Finnish Journal of Business Economics, 4, 375 – 383. Tainio, R. (1999) Strategic Change in the Evolution of Cooperatives, The Finnish Journal of Business Economics, 4, 484 – 490. Tannenbaum, A.S (1983) Employee-owned companies, Research in Organizational Behaviour, Vol. 5. 235 – 268. Thomsen, S. (2004) Corporate Values and Corporate Governance, Corporate Governance, 4, 4, 29 – 46. Thomsen, S. & Pedersen, T. (2000) Ownership Structure and Economic Performance in the Largest European Companies, Strategic Management Journal, 21, 689 – 705. Tushman, M. L., Newman, W., & Romanelli, E. (1986) Convergence and upheaval: Managing unsteady pace of organization evolution. California Management Review, 29: 29-44. Van Dyne, L., & Pierce, J.L. (2004). Psychological ownership and feelings of possession: Three field studies predicting employee attitudes and organization citizenship behavior. Journal of Organizational Behavior, 25, 439-459. Wade, J. & O’Reilly, C. A. III & Chandratat, I. (1990) Golden Parachutes. CEOs and the Exercise of Social Influence,

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

39

MANAGING MEMBER HETEROGENEITY

How to Deal with Member Heterogeneity – management implications Jon H. Hanf and Erik Scweickert

Abstract It is clear that in recent years vertically coordinated chain systems have gained in importance in the agribusiness. Thus, analyzing strategic questions of any agri-businesses must consider vertically coordinated systems. A co-op’s strategy must account for the demands of the network and in particular those of the focal company. Due to the principles of co-ops, a potential conflict arises. In addition to these conflicting goals, the co-op management also must consider that in general their members are very heterogeneous. We consider a management concept that aims to create homogeneous member groups with which certain important highly strategic requirements of the focal company can be fulfilled. The aim of our paper is twofold: (1) we want to empirically test whether co-operatives actually divide their members into homogeneous subgroups.(2) we want to determine whether this strategy has a positive contribution to the co-operatives’ success. We have chosen wine co-operatives for the empirical portion of our study.

Key words Co-operatives, German Wine Market, Strategic Member group, Success Factor

Introduction In the literature as well as in practice there is a great deal of discussion on the topic of member heterogeneity. For example, Bijman (2005) has shown that there is a positive correlation between the homogeneity of the members and the success of cooperatives. However, take the example of a German wine co-opeative which produces wine on roughly 400 ha. While the largest member owns about 180 ha and the top 10 members together hold about 300 ha, the remaining 500 members grow wine on approximately 100 ha altogether. Without doubt, one can consider the member of this co-operative to be heterogeneous. However, the management as well as the members consider their co-operative as very successful. So how is the success achieved? The management of 40

the co-op has divided its members into different groups. Within these groups the members have similar quality orientation and business strategies. Producing different quality categories the co-operative is able to supply their different customers according to their needs. According to this example the aim of our paper is twofold. First we want to empirically test whether cooperatives actually divide their members into homogeneous subgroups. Second, we want to determine whether this strategy has a positive contribution to the co-operatives’ success. We have chosen wine co-operatives for the empirical portion of our study for mainly two reasons. First, in accordance with the general trend of Raiffeisen co-operatives, wine co-operatives are undergoing structural change, albeit at a slower pace. Second, wine co-operatives have a large number of members that are very heterogeneous. Our paper is structured as follows. In section 2 we address problems esteeming of the co-operative principals and take a closer look on member heterogeneity. In the third section we introduce wine co-operatives and outline the relevance of strategic member groups in this sector. Section 4 deals with the empirical aspect and includes our results. In the last section we address the limitations of our work as well as the managerial implications and we give a short summary.

Co-operatives and member heterogeneity Problems in Co-operatives The German Raiffeisen co-operative system can be described as rich in tradition and highly developed. The principles of Raiffeisen co-operatives are the identity of users and owners, member orientation, the democratic principle of voting, and the lack of barriers to entry (Anschhoff and Henningsen, 1986; Laurinkari and Brazda, 1990). Other business goals such as correcting market failure, guaranteeing markets, and enhancing margins can be viewed as tools to meet those business goals (van Dijk, 1997; Cook, 1997; Sykuta and Cook, 2001). Due to their unique institutional form as a memberowned firm, co-operatives face several problems.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

MANAGING MEMBER HETEROGENEITY

Traditionally, an open membership policy has led to cooperatives having rather heterogeneous members. However, in Germany there is a tendency for Raiffeisen co-operatives to merge1, those merged co-operatives are becoming more diverse in their business operations in addition to their members becoming more heterogeneous. In general, members can vary according to their geographic dispersion, variance in age and education, farm sizes and type, as well as business objectives and strategies (Iliopoulis and Cook, 1999). Bijman (2005) deduces that membership heterogeneity could cause a number of inefficiency problems, including agency problems, commitment problems, decision-making problems, opportunistic behavior, coordination problems, and problems regarding the strategic focus. Furthermore, Fulton and Giannakas (2001) showed that the cross-subsidization and member heterogeneity in large centralized, multipurpose co-operatives may lead to substantial financial pressures for the cooperative because members do not see a strong connection between the success of the co-operative and their own business. However, Raiffeisen cooperatives can be characterized as being Janus faced, i.e. they are member-owned firms as well as associations of individuals (Anschhoff and Henningsen, 1986). In addition to economic matters, social mechanisms such as trust and loyalty to the cooperative firm are of high importance. However, the more heterogeneous the members, the more these social mechanisms lose their function (Bijman, 2005). Using a property rights approach, Cook (1995) pointed out five general sets of problems: free riding problems, horizon problems, portfolio problems, control problems, and influence cost problems. Furthermore, Karantininis and Zago (2001) showed that instead of selling their commodities to open co-operatives, farmers would rather sell them to investor-owned firms if they had the choice. Fulton (1995) concludes that if markets disappear as a result of increased vertical coordination, co-operatives may also begin to disappear. Hendrikse and Bijman (2002) share this assessment in the event that the investment of the processor or retailer becomes more important for the total chain value than the investments by the farmers. Because of the importance of quality in the agribusiness, the findings of Eilers and Hanf (1999) address a major weakness of co-operatives. Using a principalagent approach and the concepts of opportunistic behavior, conflicts of interest, asymmetric information, and stochastic conditions, they showed that it is not clear who is the principal and who is the agent, i.e. both the co-operatives and the members can be

principals and agents. For this reason, neither leadership mechanisms nor selective terms of delivery can be enforced by the co-operatives, i.e. the members can deliver all the commodities that alternative dealers do not accept. Co-operatives that are forced to accept these commodities face the problem of adverse selection. Cook (1994) showed that in comparison to a manager of an investor owned firm the overall challenges of a co-operative manager are not significantly different but more difficult. Homogeneous member interests Evaluating the problems of co-operatives, we attached particular importance to the members’ heterogeneity. The more heterogeneous the members, the more single interests have to be combined and satisfied. In contrast, we assume a positive correlation between the homogeneity of members or their interests and the efficiency and success of the co-operative. Thus, we think that a co-operative should have a strategy to make their member interests more homogeneous to work successfully. The introduction of “New Generation Co-operatives”2 in the U.S. shows that aligning the interests of specialized farmers or marketing their products in a special way enhances the co-operative’s performance (Cook and Chaddad, 2004; Cook, 1995; Drescher and Ratjen, 1999; Harris et al., 1996). In recent years so-called umbrella co-operatives have been studied in this context. Such “multi-string co-ops” act as a kind of holding structure for different activities which are within themselves focused (Bijman, 2005; Bijman et al., 2004; Fulton and Gibbings, 2000). Examples include Danish Crown in Denmark (Nilsson and Petersen, 2001) and The Greenery in the Netherlands (Bijman and Hendrikse, 2003). Another approach is the formation of “strategic member groups.” Hanf and Schweickert (2003) have defined them as clusters of members of a co-operative which have a similar strategy and/or aim at the same market. Thus, these members have homogeneous interests regarding at least one particular business goal. Thus, the interests within a strategic member group3 can be described as homogeneous and heterogeneous against those of other strategic member groups. By using the concept of “strategic member groups” the management of a co-operative can segment its members in different groups with homogeneous interests. The management is thereby able to work out different strategies to satisfy the different member groups. In a more general context Iliopolis and Cook (1999) have shown that members of a co-operative can be segmented according to the degree of geographical dispersion of the members, variance in members’ age and education level, the

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

41

MANAGING MEMBER HETEROGENEITY

percentage of non-farm income, and differences in business objectives and strategy.

Co-operatives in the German wine sector Having addressed co-ops and the problems of heterogeneous member interests in theoretical and general context, in the following section we apply our thoughts in an empirical study. This study was conducted in the German wine sector. Although this is a particular sector, the co-operative problems are similar to those of general Raiffeisen co-operatives. Thus, the results and insights we gain are not only valuable and applicable within this particular sector, but they are also general in nature. Wine co-operatives strive to improve their members’ economic situation by collaborating in vinification and marketing of the grapes or their processed products. Accordingly, the general function of wine co-operatives can be described processing grapes, producing must, and vinificating (fermenting, fining, clearing, and other oenological practices in the cellar for winemaking), bottling, and marketing wine. German wine cooperatives play an important role in the business; in the fiscal year 2001-02 they produced nearly 35% of the nation’s wine. Due to the sectors structure4, the majority of wine growers are members of cooperatives. More than 60,000 members belong to 246 primary co-operatives5. Additionally, two secondary cooperatives (federations) have been established. The increase in retailers’ power as well as the shift in consumer demand has had obvious effects on the wine co-operatives. Facing a situation where nationwide operating retailers are responsible for more than 70% of wine sales, co-operatives have had to rearrange their distribution channels. On the one hand, having traditionally focused on the local or regional markets and quantity and financial restraints, the majority of small and medium-sized primary wine co-operatives continue to direct their marketing efforts toward specialized retailers (special wine stores), local retailers, restaurants, and direct selling. On the other hand large, primary as well as secondary co-ops target the retail market. Thus, they have to deal with the demands of the retailers and their customers. Meeting the quality demands of the retailers and of the consumers is necessary to prevail in the market. Thus, co-operatives must produce and market huge quantities of easy recognizable good quality wine. Wine co-operatives have traditionally paid the same price for all grapes. The only differentiation is by grading the 42

grapes on a six-level scale determined by a minimum degree °Oechsle. Hence, every member produces those grapes he likes best or that he has always grown, without considering whether the grapes match the consumer quality criteria. Additionally, members of German co-operatives are not obliged to deliver defined amounts and defined quality; instead the cooperative must accept and market any kind of quality and amount. As a result, members select their grapes adversely so that they sell the grapes of better quality to other businesses, mostly privately owned enterprises. The introduction of the profile wine concept6 as well as the demands of the retailers gave the co-operatves the unique chance to work out a marketing strategy based on the consumer and retailer demands, instead of member production. By demanding tight quality management, the profile wine concept creates at least two member groups with homogeneous quality understanding and homogeneous business interests so they can be called strategic member groups. Because the profile wine concept is only an additional law, members are not required to comply with it. However, if they choose to get involved, they must abide by its obligations and rules. The obligations and rules of ‘Classic’ and ‘Selection’ are explained below. The profile wine concept demands more quality management efforts than waiting to see what the vintage will bring and making the best with the raw material. Under the new concept of Classic, wine growers need to know in advance which care and attention measures they will use to achieve the optimum grape quality for a special type of profile wine: appropriate vine-cutting, adjusted green cover and fertilization, special vine protection, and desuckering and thinning out surplus grapes. Wine cooperatives know the quality levels to be expected by the documentation of each vintage; therefore, they can plan the process and rate the grapes before they are pressed. The co-operatives pay more for those grapes that produce a higher-quality wine. For the Selection profile wine type, the co-operatives must additionally rate the grapes and the vines both. The oenologists of the co-operatives must choose the best vineyards and define the criteria of the ‘strategic member group Selection.’ The groups’ viticulturists must adhere to the selected measures for the vines. Therefore, the vines are rated and documented through the year at different degrees of vine development. Moreover, a rating of the vines, defined labor-measures in the vineyards over the year and special harvesting requests must be conducted and supervised by the co-operative. Furthermore, the vines

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

MANAGING MEMBER HETEROGENEITY

have to be registered by the Federal Wine Authorities. In summary, in the face of shifts in consumer demand and the increasing importance of retailers in the wine chain, wine co-operatives must find strategies to overcome quality and quantity problems resulting from the co-operative principles in general and the wine industry in particular. The introduction of the profile wine concept has helped to build strategic member groups so that co-operatives can offer an attractive product portfolio to retail customers as well as end consumers. This theoretical framework will be empirically tested in the following study. Additionally, it will analyze whether co-operatives using this approach work successfully.

Empirical analyses We analyzed the 147 wine co-operatives with own vinification (“wet“ wine co-operatives) by questionnaire; more than 40% of them responded. The composition of the analyzed “wet“ wine co-operatives is representative so that all German wine-growing regions are fully represented. Only the four small winegrowing regions with only 1 or 2 small “wet“ wine cooperatives are underrepresented. The majority (78.3 %) of the analyzed co-operatives are between 51 and 100 years old. One-third of the “wet“ wine cooperativess have vineyards of 100 to 200 ha and the number of members differs ranges from 100 to 300. Fifteen percent of those sampled produce their wine on fewer than 50 ha and 10% have more than 500 ha. The quality of a wine is determined by a variety of influences; however the type and taste of the wine are

mainly dominated by the grapes and the work done on the vines (Troost, 1988). Therefore, we examine the measures used to create this competitive advantage. In our survey 71.7 % of the “wet“ wine co-operatives pay the viticulturist according to their “yield per hectare.” Through this payment-measure they encourage the wine-growers not to exaggerate the potential of the vines, resulting in better wine quality. As shown in Table 2 they rated the measure 2.22 on a scale from 1 to 5. Because the value of the measure “Average Oechsle” with 1.82 is lower than the one for “yield per hectare,” “wet“ wine co-operatives (80%) apply the measure “Average Oechsle” more often. One reason is because this procedure has a self-financing character. The viticulturists are not paid until the vintage is over. Afterwards they analyze the average degree Oechsle for every variety. Based on these results, they pay a surcharge for those viticulturists who delivered grapes above the average degree (depending how much the grapes are above the average). Respectively, viticulturists who deliver below-average grapes are paid less. The payment depends on the sugar content. The least used procedure was the system of rating the grapes before they are pressed. Forty-five percent of the “wet“ wine co-operatives did not apply this procedure of negative-selection in which grapes that do not match the minimum quality level are picked out. We suppose that one reason why the “wet“ wine co-operatives hesitate to implement this procedure is the missing positive incentive and the resulting negative mood if the grapes are not accepted after one year of hard work.

Table 1: Empirical results of the “wet“ wine co-operativs’ measures to create competitive advantages Yield per Hectare

Average Oechsle

Grape Rating

Open Strategic Member Group

Closed Strategic Member Group

Valid

60

60

60

60

60

Missing

0

0

0

0

0

Mean

2.22

1.82

3.00

2.08

1.97

Modus

1

1

5

1

1

1.606

1.408

1.657

1.565

1.507

Rangea

4

4

4

4

4

Minimum

1

1

1

1

1

Maximum

5

5

5

5

5

N

Std.-Deviation

a) No "wet“ wine co-operative chooses the value 3 = indifferent; they all took a position. International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

43

MANAGING MEMBER HETEROGENEITY

Table 2: Connection Between Success and Open Strategic Member Group Number of "Wet“ Wine Co-operatives per Success-Category that Build an Open Strategic Member Group Extent of an Open Strategic Member Group Success-Category

We do this measure fully

Yes we do

Indifferent

we do not really do

No we don’t

Very Successful

5

0

0

0

2

Successful

28

6

0

5

3

Don't Know

2

0

0

1

1

Not Successful

5

0

0

0

0

Very Unsuccessful

0

1

0

0

0

No Statement

1

0

0

0

0

The concept of an open strategic member group is opposite to the negative selection concept. We consider the open strategic member group a weaker form of the above-described concept of building a strategic member group. 73.3 % of the analyzed cooperatives offer their viticulturists the option to rate the grapes for the production of higher quality profilewine. The viticulturists receive more money if their grapes match the criteria. Corresponding to the demand for this type of wine, every member has the chance to join this open strategic member group. The value 2.08 (2 = yes we do) on the scale shows the agreement of the “wet“ wine co-operatives with this system. One step further is the system of the closed strategic member group, implemented by 78.3 % of the “wet“ wine co-operatives. The value 1.97 on the

scale confirms the important role of this strategic member group. Strategic member groups are not only implemented because of the production of the Classic and Selection profile wines. In addition to 48.3 % of the “wet“ wine co-operatives already producing Classic wines, 25% of the co-operatives produce according to the matching standards but they market these wines differently. Therefore, 73.3% of the “wet“ wine co-operatives have open strategic member groups producing at a high standard. The same is true for Selection: 78.3 % have closed strategic member groups but only 38.3 % produce Selection or the corresponding ‘1.Gewächs’ (grand cru). This indicates the importance of strategic member groups as a competitive advantage. Indeed,

Table 3: Connection Between Success and Closed Strategic Member Group Number of "Wet“ Wine Co-operatives per Success-Category that Build a Closed Strategic Member Group Extent of a Closed Strategic Member Group Success-Category

We do this measure fully

Yes we do

Indifferent

we do not really do

No we don’t

Very Successful

5

2

0

0

0

Successful

24

7

0

4

7

Don't Know

2

1

0

0

1

Not Successful

4

0

0

0

1

Very Unsuccessful

1

0

0

0

0

No Statement

1

0

0

0

0

44

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

MANAGING MEMBER HETEROGENEITY

introducing the profile wine concept led to strategic member groups The study also analyzes the connection between the success of the analyzed co-operatives and the implementation of strategic member groups. Looking at the building of an open strategic member group in Table 3 we see that in particular the successful (28 times) and very successful (5 times) “wet“ wine cooperativess built an open strategic member group. We see a even more precise picture in Fig. 3. Every very successful “wet“ wine co-operative either implemented a closed strategic member group (5 times) or somehow introduced a closed strategic member group. In part of the “only” successful cooperatives we find 24 really introducing and 7 somehow introducing a closed strategic member group. Thus, 63.4% of the “wet“ wine co-operatives that built a closed strategic member group are successful or very successful. Only 6.7 % of them are not successful, and no more than 1.7 % are very unsuccessful. The results of our survey show that German wine cooperatives are looking for ways to enhance their quality by overcoming some traditional restraints of cooperatives. The results show that co-operatives try to work out management approaches and incentive schemes that make heterogeneous member interests more homogeneous.

Conclusion Limitations Our study, as any study, suffers from some limitations. It is based on a single sector with its own particular characteristics. Thus, one can argue whether it is possible to generalize the results across sectors. However, because the derivation is based on arguments found in general co-operative theories and related managerial approaches, we assume that this restraint is softened. Questioning the management of co-operatives can be a subject of dispute. Instead, we could have surveyed members. However, we understand the formation of strategic member groups as a strategic management assignment. By particularly considering the developments in the downstream side, we think that a sole member orientation is not adequate today. In other words, a successful strategy has to consider the upstream as well as the downstream side. The method of self-typing also can be questioned. However, opposite to investor-owned firms, where

success can easily be measured solely by short- and/or long-term oriented financial performance, co-operative success must be measured in a broader sense. Because co-operative success includes hard and soft facts alike, we decided to use the self-typing approach. Co-op managers in the German wine business work closely together with the supervisory board; therefore, we believe that the managers can accurately judge the overall performance of the co-op. Managerial implications and future research In several interviews managers and members of the supervisory boards told us that they see a need to deal with the heterogeneous member interests on one side and to build a bridge between the demands of the members and the demands of the retailers and the end consumers on the other side. In this context we see the main managerial implications of our article. Using the approach of strategic member groups, the co-op management can either segment their members according to the members’ own interests or, if the management is facing external pressure, according to such external interests. Thus, we believe that by forming strategic member groups and working out appropriate marketing strategies for them, the management of co-operatives is able to satisfy the needs and demands of their members as well as those of retailers and consumers. We see two main areas for future research. Because the topic of building homogeneous member interests is not only important to wine co-operatives, we consider this topic to be of high general interest and we want to encourage studies in other sectors. We also consider the question of who should be surveyed. We outlined above why we have considered the management, in our context, as the most appropriate. However, because co-ops are member driven organizations, we encourage studies which analyze the values the members attach to efforts making their interests more homogeneous. Summary Like every other enterprise co-operatives are embedded in an environment of fierce competition. Especially the demand of the retail business is high. The retailers demand high quality on the one hand, decreasing prices on the other. These demands of the upstream side put co-operative managers in a dilemma: on the upstream side their members are not accustomed to strict quality requirements and delivery obligations. This traditional approach to quality management, together with great variation of member sizes, leads to heterogeneous quality policies at the

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

45

MANAGING MEMBER HETEROGENEITY

members firms. Thus, the management of the cooperatives must provide a solution. By grouping the members according to their quality policies the co-ops can create groups of members with homogeneous business interests and they are simultaneously able to create different product ranges so that they can satisfy the downstream demands. We conducted our empirical survey at vinificating wine co-operatives in Germany because the new profile wine concept has given wine co-operatives the ability to apply stricter quality management as well as delivery obligations. The results show that wine cooperatives use profile wine concept as one method to group their members. We also observed an increase in the quality for these groups. Moreover, we found that this increase of quality, which was due to belonging to a strategic member group, correlated with better performance.

Notes 1

See fig 4 in the appendix

2

The “New Generation Co-operative” can be understand as Sapiro III organizations in which asset appreciation mechanism, base equity plans, as well as increased share liquidity by delivery rights clearing houses have been developed (Cook 1995). The major advantage can be seen in the improvement of members` incentives to contribute to risk capital to the co-operative (Chaddad and Cook, 2004).

3

4

5

6

46

This definition shows that the idea of “strategic member groups” is derived from the idea of “strategic groups” which are used to detect the main rivals of a firm. The concept of strategic groups has to be seen in the context of the value chain and the generic strategies of cost leadership, market-wide differentiation, and in niche markets as well as the model of the five forces (Cloutier and Saives, 2002; Dranove et al., 1998; Leask and Pranell, 2005; Gloy, 1996; Homburg and Sütterlin, 1992; McLeay et al. 1996; Porter 1980). The structure of grape growers is dominated by small wine-growers. Overall, there are more than 34,375 wine businesses. Wine co-ops can be divided into 147 “wet” wine coops, which possess their own vinification facilities, and 99 “dry” wine co-ops that do not conduct their own vinification. The profile wine concept is based on a law to enforce the production of classic-styled wines with

an easily recognizable origin type (Schweickert, 2002). In addition to the traditional wine labeling system, the profile wine concept introduced the category-terms ‘Classic’ and ‘Selection’ (Schweickert, 2005).

References Books Aschhoff, G. and E. Henningsen (1986). The German Cooperative System. Publications of the DG Bank, Frankfurt am Main. Bijman, J. (2005). Co-operatives and heterogeneous membership: eight propositions for improving organizational efficiency. Paper presented at the EMNetConference, Budapest, Hungary, September 15-17. Bijman, J., Chaddad, F.R. and Cook, M.L. (2004). How strengthening vertical coordinationmay lead to restructuring of macrohierarchies. In Bremmers, H.J., Omta, S.W.F., Trienekens, J.H. and Wubben, E.F.M. (eds.) Dynamics in Chains and Networks. Proceedings of the 6th International Conference on Chain and Network Management in Agibusiness and the Food Industry, Wagening Academic Publishers, 252-261. Cook, M.L. (1997). “Organizational Structure and Globalization: The Case of User Oriented Firms” in Nilson, J. and van Dijk, G. (eds.) “Strategies and Structures in the Agro-food Industries”, van Gorcum, pp. 77-93. Downey, W.D. (1998). The Challenge of Food and Agri Products Supply Chains. In Trienekens, J.H. and Zuurbier, P.J.P. (eds.) Proceedings of the 2nd International Conference on Chain Management in Agri- Food Business. Wageningen Agricultural University, Department of Management Studies. Eilers, C. and C.-H. Hanf (1999). Contracts between Farmers and Farmers – Processing Co-operatives: A Principal-Agent Approach for the Potato Starch Industry in Galizzi, G. and L. Venturini (eds.) Vertical Relationships and Coordination in the Food System, Heidelberg, 267-284. Fulton, M. and J. Gibbings (2000). Response and Adaptation. Canadian Agricultural Co-operatives in the 21st Century. Saskatoon, University of Saskatchewan, Centre for the Study of Co-operatives. Laurinkari, J. and J. Brazda (1990). Genossenschaftliche Grundwerte. In Laurinkari, J. (ed.) Genossenschaftswesen. Oldenburg Verlag, Munich Vienna, 70-78. Porter, M.E. (1980). Competitive Strategy: Technique for Analyzing Industries and Competitors. Free Press, New York. Journals Bijman, J. and G. Hendrikse, (2003). Co-operatives in chains: institutional restructuring in the Dutch fruit and vegetable industry. Journal on Chain and Network Science, Vol. 3: 95-107.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

MANAGING MEMBER HETEROGENEITY

Boehlje, M., 1999. Structural changes in the agricultural industries: how do we measure, analyze and understand them? American Journal of Agricultural Economics, Vol. 81, No 5, 1028–1041. Chaddad, F.R. and Cook, M.L. (2004). “Understanding New Co-operative Models: An Ownership-Control Rights Typology”, Review of Agricultural Economics, 26: 348-360. Cloutier, L.M. and Saives, A.-L. (2002). Functional Eating Strategic Groups in Canada. Canadian Journal of Agricultural Economics, 50:569-585. Cook, M.L and Chaddad, F.R. (2004). Redesigning Cooperative Boundaries: The Emergence of New Models. American Journal of Agricultural Economics, 86 (5): 12491253. Cook, M.L. (1995). The Future of U.S. Agricultural Cooperatives: A Neo-Institutional Approach. American Journal of Agricultural Economics, 77: 1153-1159. Cook, M.L. (1994). The Role of Management Behavior in Agricultural Co-operatives. Journal of Agricultural Cooperatives, 9: 42-58. Dranove, D.; Petraf, M.and Shanley, M. (1998). Do Strategic Groups Exist? An Economic Framework for Analysis. Strategic Management Journal, 19: 1029-1044. Drescher, K. and Ratjen, U. (1999). “New Generation Cooperatives – Möglichkeiten und Grenzen der Übertragbarkeit auf die Bundesrepublik Deutschland”. Zeitung für das gesamte Genossenschaftswesen, 49: 264277. Fulton, M. and K. Giannakas (2001). Organizational Commitment in a Mixed Oligopoly: Agricultural Cooperatives and Investor-Owned Firms. American Journal of Agricultural Economics, 83: 1258-1265. Fulton, M. (1995). “The Future of Canadian Agricultural Co-operatives: A Property Rights Approach”. American Journal of Agricultural Economics, 77: 1144-1152. Gloy, D. (1996). Entwicklungspfade von Molkereiunternehmen. Eine Anwendung des Konzeptes der strategischen Gruppen. Agrarwirtschaft, 45:131-142.

Americam Journal of Agricultural Economics, 84: 104-119. Harris, A., Stefanson, B. and M. Fulton (1996). New generation co-operatives and co-perative theory. Journal of Co-operatives, 11: 15-22. Homburg, C. and Sütterlin, S. (1992). Strategische Gruppen: Ein Survey. Zeitschrift für Betriebswirtschaft, 62: 635-662. Karantininis, K. and A. Zago (2001). Endogenous Membership in Mixed Duopsonies. American Journal of Agricultural Economics, 83: 1266-1272. Leask, G. and Parnell, J.A. (2005). Integrating Strategic Groups and the Resource Based View: Understanding Competitive Process. European Management Journal, 23, 458-470. McLeay, F. ; Martin, S. and Zwart, T. (1996). Farm Business Marketing Behavior and Strategic Groups in Agriculture. Agribusiness: An International Journal, 12: 339-351. Raiffeisen 2004. www.raiffeisen.de Schweickert, E. (2002). Informationsstandardisierung oder –differenzierung bei Profilweinen. der Oenologe, 30 (1): 3 – 5. Sykuta, M.E. and Cook, M.L. (2001). “A New Institutional Approach to Contracts and Co-operatives”. American Journal of Agricultural Economics, 83: 1273-1279.

Miscellaneous Hanf, J. H. and E. Schweickert (2003). Co-operative Success by Forming a Strategic Member Group. Paper presented at the Conference Vertical Markets and Co-operative Hierarchies, Bad Herrenalb, Germany. Iliopolis, C. and M.L. Cook (1999). The Efficiency of Internal resource allocation Decisions in Customer-owned Firms: The Influence Costs Problem. Paper presented at the 3rd Annual Conference of the International Society for New Institutional Economics Washington, D.C., September 16-18.

Nilsson, J. and S.B Petersen (2001). The Rationale of Traditional Co-operatives – the Case of Danish Crown. In S.O. Borgen (ed.) The Food Sector in Transition – Nordic Research. Oslo: Norwegian agricultural Economics Research Institute (NILF Report:2): 1-12. Schweickert, E. (2005). Weinwirtschaft in der EU. In: Mickel, W. W. and J. M. Bergmann (eds.) Handlexikon der Europäischen Union. Baden-Baden: Nomos: 798 – 802. van Dijk, G. (1997). “Implementing the Sixth Reason for Cooperation: New Generation Co-operatives in Agribusiness” in Nilson, J. and/van Dijk, G.(eds.) “Strategies and Structures in the Agro-food Industries”, van Gorcum, pp.: 94-110. Hendrikse, G.W.J. and Bijman, J. (2002). “Ownership Structure in Agrifood Chains: The Marketing Co-operative”.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

47

MANAGING MEMBER HETEROGENEITY

Appendix Table 4: Development of Raiffeisen Co-operatives 19502003* (Raiffeisen, 2004) 1950

1970

1990

2001

2002

2003

Total No. of Raiffeisen cooperatives

23.753

13.764

5.199

3.632

3.423

3.286

Credit with commodity business

11.216

4.920

1.474

354

301

274

Supply and marketing

2.710

1.740

645

473

458

430

Dairies

5.726

3.705

846

378

354

347

Livestock and meat

329

263

205

112

117

106

Wine-growers

508

500

310

256

238

236

Fruit, vegetable, gardening

205

201

114

125

121

117

Centers

83

90

53

32

29

27

795

769

751

Agricultural cooperatives Other Raiffeisen cooperatives

2.976

2.345

1.552

1.107

1.036

998

Total proceeds turnover (Mio. Euro)

3.463

17.461

39.030

39.431

37.596*

37.500*

Total No. membership (in thousands)

3.278

3.870

4.487

2.653

2.495*

2.385*

*preliminary figures

48

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

SOCIAL RESPONSIBILITY

Social Responsibility in S Group co-operatives: a qualitative analysis of archival data Terhi Uski, IIiro Jussila, Susa Kovanen

Abstract In recent years, the concept of corporate social responsibility (CSR) has been of interest to many scholars in the field of management. Dimensions of CSR, such as social and environmental values have been typically supported by co-operatives, which often operate in social economy. The aim of this article is to understand how CSR is constructed and how it is connected to stakeholder relations in Finnish S Group co-operatives. Based on our qualitative analysis, we suggest that the social responsibility of the case organization can be interpreted as fulfilling cooperative values, emphasizing regional responsibility, understanding the importance of customer-owner relations and taking care of the continuity of cooperative business.

Key words Co-operation, Stakeholders

Corporate

Social

Responsibility,

Introduction Research on corporate social responsibility (CSR) (e.g., Knox & Maklan, 2004; Carroll, 1998; 1981) has received a lot of scholarly attention in recent decades. The key approaches may be divided into three approaches: 1) ethical responsibility, 2) economic responsibility, and 3) corporate citizenship (Windsor, 2006). More specifically, CSR related questions have been studied in various theoretical frameworks (McWilliams, Siegel, Wright, 2006), such as agency theory (e.g., Friedman, 1970), stewardship theory (e.g., Donaldson & Davis, 1991), resource-based view of the firm (e.g., Hart, 1995), institutional theory (e.g., Jennings & Zandbergen, 1995), theory of the firm (e.g., McWilliams & Siegel, 2001) and stakeholder theory (e.g., Smith, 2003). The stakeholder perspective has been widely employed in research on CSR (e.g., Agle, Mitchell, Sonnenfelt, 1999; Berman, Wicks, Kotha & Jones, 1999). Despite of the extensive attention to CSR in research on mainstream organizations, the framework has been rarely employed to analyze CSR in a co-operative context. This may be seen as ironic given that social

responsibility has traditionally been an essential part of the co-operative philosophy (e.g., MacPherson, 1995; Münkner, 1981). This is illustrated by co-operative values and principles which include, for example, “concern for the community” (See International Cooperative Alliance, Geneva, Statement of Co-operative Identity 1995, MacPherson, 1995, p21, Nilsson, 1996, p637). The co-operative philosophy seems to be consistent also with Carroll’s (1979) definitions of corporate social responsibility, according to which a responsible business enterprise notifies not only economical and legal demands, but also the ethical demands which the society directs to the business operation. That is, co-operatives are - in their operations and businesses - sensitive to the interests of their stakeholders. In a broad definition, stakeholders are usually characterized as “any group or individual who can affect or is affected by the achievement of the organization’s objectives” (Freeman, 1984, p46). According to this definition, it seems that any social actor functioning within the community context of a co-operative can be considered as a stakeholder of the co-operative organization. This may be particularly significant in the context of consumer co-operatives. In this study we will focus on stakeholder theory perspective on CSR (e.g., Donaldson & Preston, 1995). The aim of our study is to describe and understand how social responsibility is constructed and how it is linked to stakeholder relations in Finnish S Group cooperatives. We employ qualitative methods (e.g., Denzin & Lincoln, 2003) to solve the mystery of CSR in the given context. Our data consists of various written articles and archival materials published in S Group’s magazines during the years 2000-2005.

Corporate social responsibility Regardless of the wide recognition of CSR in various fields of research (Van Marrewijk, 2003), academics have not come to an agreement on the key question What is the importance of CSR to the enterprise? For example, some economists (e.g., Friedman, 1962) have argued that the only social responsibility of an enterprise is its efficient use of resources in order to increase its profits. Some of the recent strategy scholars (e.g., Grant, 2005) seem to agree with the Friedman

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

49

SOCIAL RESPONSIBILITY

economistic and market based approach in their accounts of the topic, emphasizing profit maximization as the only objective of a firm’s operations. However, there exist many strong arguments that speak for the benefits of social responsibility to the enterprise (Davis, 1973). First of all, the enterprise must produce those goods and services for which there exists demand at a given time. In other words, the better the enterprise follows the expectations and the needs of a society, the better it will position itself in a society. Secondly, by following and reacting to the expectations of the society, the enterprise may achieve a more favorable image on the markets (see also Knox & Maklan, 2004). Thirdly, social responsibility may operate as a competitive advantage of an enterprise or at the minimum it can be considered as a precondition for successful business operation. Davis (1973) defined that social responsibility takes into account also other demands than solely the legal demands which the enterprise faces. This is because society grants authority (legitimacy and power) to business leaders and, “in the long run, those who do not use power in a manner which society considers responsible will tend to lose it” (Davis, 1973 p.314). A more elaborated framework of CSR was developed by Carroll (1979), who added an ethical perspective to corporate social responsibility to the previously employed economic and legal views. By employing CSR an enterprise takes into account the needs and interests of the wider society in its operations and decisions (George, 2003). According to stakeholdertheory, CSR refers to a condition where an enterprise aims at making decisions which have positive impacts on all of its stakeholders (Epstein, 1987: 104). Finally, Windsor (2006) has added an environmental dimension to our understanding of how CSR is acted out by arguing for the inclusion of values supporting environmental sustainability as being at core of the responsible enterprise’s value base today.

Stakeholder perspective One of the fundamental questions of CSR is “Why the enterprise should consider social responsibility in its actions?” One of the rationales of CSR is that if an enterprise itself shows that it follows the principles and ethics of CSR, the legislators - a group of stakeholders (Freeman & Reed, 1983) - do not have to impose legislations in order to direct the enterprise to a more “responsible direction” (Davis, 1973, p314). In a broader sense, organizations may engage in CSR to gain legitimacy from their stakeholders in order to survive (e.g., Meyer & Rowan, 1977; Mizruchi & Fein, 50

1999). Stakeholders (Smith, 2003; Mitchell, Agle, Wood, 1997; Murray & Vogel, 1997; Freemand & Reed, 1983) are usually characterized as social actors (individuals or organizations) which effect the operations of an enterprise or to whom the enterprise has an effect on such as the owners, investors, employees or customers of the enterprise. In other words, the relationships that exist between the stakeholder and the enterprise are usually based on ownership, contract, and customerrelationship or on legal demands (Talvio & Välimaa, 2004, p49). Donaldson and Preston (1995, p87) point out that research on stakeholder-theory usually focuses on analyzing corporate stakeholders from normative, descriptive (empirical) or instrumental views. The normative view on stakeholders (Carroll, 1989) gives guidance on how an enterprise should treat its stakeholders and why it should acknowledge the expectations of various stakeholders and act on them. George (2003) argues that employees are one of the most important stakeholder-groups for an enterprise and as such employers’ should pay attention to them. Employees who are motivated to serve the customers of the enterprise and to develop the business operation, provide the company with a competitive advantage due to the development of competences which are difficult to reproduce by competitors. The descriptive view on stakeholders (e.g., Brenner & Cochran, 1991) describes how the enterprise manages its stakeholders or interacts with them and whether it takes into account the expectations of the stakeholders. The instrumental view on stakeholders (e.g., Aupperle, Carroll & Hatfield, 1985) focuses on analyzing how and to what extent the stakeholders can effect the operation of the enterprise. Corporate social responsibility and stakeholder perspective on co-operatives According to the literature on co-operatives (e.g., Skurnik, 2005; Nilsson, 1996; Münkner, 1981), it is typical for co-operative organizations to aim at both economic and social goals in their operations. Laurinkari (2004, p 25), for one, writes that; “co-operation is about economic or social collaboration and is exercised in the form ofcooperative business enterprise in order to satisfy the various needs of co-operative’s members”. That is, the purpose of co-operative enterprises is not profit maximization. (Nilsson, 1996 and Munkner, 1981) Instead, co-operatives typically aim at delivery of valued services to their members which add value, both economic and social, to their members as well as the surrounding society. There is a collective dimension as well as an individual dimension to the

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

SOCIAL RESPONSIBILITY

value added process in a co-operative but it is not profit as such as it remains undistributed during the cooperatives life time lifetime and in a wind up context even them in some examples (see the Industrial Common Ownership Model in the UK) monies left after creditors ext has to be reinvested in another cooperative or co-operative investment fund. In other words, various dimensions of CSR may be considered important for co-operatives relative to their various stakeholders and their actions in this respect are supported by the ICA Statement of Co-operative Identity – incorporated in the eight co-operative principles (cf. MacPherson, 1995). It could be argued that co-operatives gain legitimacy through their local and regional stakeholders more easily than some of their competitors whose roots may be seen to be either international or outside the region. That is, cooperatives may be looked at more favorably because co-operatives have a genuine interest in developing the community in which they are embedded in (e.g., Tuominen, Jussila, & Saksa, 2006). While it has been stated that co-operatives should operate as any other business enterprise to succeed economically well in order to compete and operate in the markets (e.g., Laidlaw, 1981), a communal approach to business can be considered rational because the survival and success of a co-operative is strongly linked to the survival and success of its operating area. This is highlighted in customer-owned businesses, which may be considered by ownership as “captives of their regions” ( Davis, 2001). This is among the reasons why co-operatives work together with other (interdependent) local and regional actors (e.g., the stakeholders that share their destiny) to create a wellfunctioning institutional environment (e.g., Kotonen, Tuominen, & Jussila, 2007). In sum, it could be argued that co-operation, corporate social responsibility and stakeholder management are closely interconnected at the level of the locality of co-operative practise and membership.

Methodology for the S. Group cooperatives study Our study was conducted in Finnish S Group, which consists of 22 independent regional co-operatives, 19 local co-operatives and central organization SOK. S Group co-operatives represent “customer-owned cooperative entrepreneurship” while SOK operates as a provider of common support services and as knowledge and development centre for regional and local co-operatives. S Group co-operatives have been

important actors in Finnish society and economy for over 100 years. In addition, they have been characterized as containers of local and regional identity reproduced in their operations. (e.g., Neilimo, 2006, p5; S Group, 2006) The purpose of S Group is to provide services and benefits to its committed customer-owners. It has been argued that they are tightly market controlled by their customer-owners (i.e., their businesses are efficiently focused to satisfy the economic needs of their members). S Group aims at increasing the commitment of their customer-owners and at acquiring committed, well concentrated members. (e.g., Neilimo, 2006 p5; S Group, 2006) In this study we aimed to reaching our objectives by qualitative methods (e.g., Denzin & Lincoln, 2003, p257). The research material consists of fifty-six articles and texts - published in S Group during years 20002005 - in which the topic of our investigation is discussed. Our iteratively enhanced understanding of the topic was based on gradual analysis. That is, first we collected empirical material through the annual reports of SOK and its social responsibility reports. By analyzing this material, we drew conclusions on how the S Group declares its definition of policy in terms of responsibility. According to our analysis, regional cooperatives are independent (i.e., inside S Group) in terms of CSR. Second, we collected and analyzed annual reports and social responsibility reports of various regional co-operatives based on the interpretations made in the first phase. Finally, while our aim was to analyze accounts on CSR aimed at employees and customer-owners, we collected the topic related articles published in S Group’s employee magazine “Ässä” and customer-owner magazine “Yhteishyvä”.

Discourses of CSR in Finnish media In Finnish society and business environment, many discourses (i.e., well established ways of speaking and writing about something) are constructed and employed to discuss CSR. Among these, Vehkaperä (2003) found four dominant discourses of CSR in Talouselämä, one of the leading business magazines in Finland. These discourses focus on 1) Benefit of the entire society, 2) Benefit of all of the company’s stakeholders, 3) Benefit of the enterprise, and 4) Benefit of the owner. According to Vehkaperä’s (2003: 97) analysis, these discourses differ from one another in that they emphasize either responsibility or consequence and either broad or narrow definition of CSR.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

51

SOCIAL RESPONSIBILITY

Fig. 1. The Discourses of CSR in Finnish media (Vehkaperä, 2003: 97) The discourses presented in Fig. 1 seem to be consistent with the distinct definitions made in previous research on CSR. For example, the ”Benefit of the entire society” - discourse seems to maintain the idea that that by employing CSR, an enterprise takes into account of the needs and interests of the wider society in its operations and decisions (cf. Carroll, 1979). On the other hand, the “Benefit of the owner” discourse is consistent with the accounts put forward by certain capitalist economists (e.g., Friedman, 1962). This particular discourse may be employed to reproduce the idea that an enterprise should concentrate in efficient use of its resources to benefit solely the owners and not, for example, to use of its resources to certain communal purposes.

The history of CSR in S Group Consistent with the previous research on co-operatives (e.g., Laurinkari, 2004; Hansmann, 1999; Nilsson, 1996), accounts put forward in our data maintain that S Group co-operatives were originally established to carry out both economic and social objectives. According to Neilimo (2006, p31) CSR has been identified as peculiar to S Group right from the beginning: “Sustainable operations are built on strong value base. The S Group’s values and operations as a regional, democratically managed group of companies suit the values of Finnish society and of Finns as individuals. This is why the S Group’s core values - excellence, responsibility, renewal and partnership - have carried us for 100 years.” According to our data, co-operatives have carried an important mission in Finnish society, which has been 52

emphasized during national crises, for example, before and the World War II. As put forward in our data, SOK and the regional co-operatives have operated as exemplary responsibility-carriers in Finnish society especially in 1930s, after the wars and during the time of reconstruction. SOK and regional co-operatives have strongly operated as promoters and supporters of Finnish education, culture and environmental issues (e.g., libraries, study circles, movies and paper recycling). That is, in addition to other dimensions of CSR, environmental values and responsibility have also been highly important in S Group (cf. Windsor, 2006). However, according to our data, S Group officially accepted the established principles and values of environmental policy (in 2002) only after the managers of co-operatives had interpreted that there were strong institutional pressures (e.g., from media) to do so. As a result of adaptation S Group finally published its first responsibility report in 2005. Accounts of co-operative history in Finland speak about development in which co-operative organizations have in various situations adapted their operations according to the demands imposed by the society and, thus, been able posit themselves in a way that secures their survival. This notion is consistent with Davis’s (1973) arguments in that the better the enterprise follows the expectations and the needs of a society, the better it will position itself in a it. On the other hand, S Group has found itself in its most severe crisis under circumstances in which it has not been able to adapt its businesses fast enough to societal changes and market pressures in 1960’s and 70’s.. During the given period, S Group did not pay enough attention to the economic dimension of CSR spoken for by Friedman (1962). Today, S Group attempts to satisfy both the economic-

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

SOCIAL RESPONSIBILITY

rational and social psychological (e.g., emotional) needs of their members. That is, the operations and businesses of S Group are designed and implemented in a way that appeals to customer-owners’ and other stakeholders’ rational and social psychological motives (e.g., Neilimo, 2006).

Definitions of CSR in S Group In management research, the definitions of CSR have included various dimensions, such as economical, legal and ethical views of responsibility (e.g., Carroll, 1979; Davis, 1973). Consistently with these, also the definitions and features of corporate social responsibility in S Group include various dimensions. As stated in our data: “The purpose of S Group is to provide services and benefits to committed customer-owners responsibly following the principles of sustainable development. By responsibility we mean locally, economically, ecologically and socially responsible long-term business operations.” According to our analysis, the discourses in S Group’s publications emphasize economical, social and environmental dimensions of corporate responsibility. S Group’s CSR seems to be consistent with the notions (e.g., Davis, 1973) according to which as enterprise has to be economically strong in order to operate and succeed in a market and society. It is consistent with, for example, Laidlaw’s (1981) ideas; the economical responsibility is often a precondition for socially responsible operation of co-operatives. In the context of our study, economic responsibility may be considered to consist of benefits for customerowners and the region in which the co-operative organization is embedded as well as the entire society. As put forward in our data, major share of the profits co-operatives show are directed to the development of their operating areas: “We return one third of our annual surplus to our members. Last year this amount was 135 million euros. One third of the surplus is used for development of operations and one third goes to taxation. Responsible action is present in each part.” Being economically responsible is considered to be appealing to stakeholders’ economic-rational motives, whereas being socially and environmentally responsible is assumed to appeal to stakeholders social motives. Finally, according to our data, all the responsible behavior is considered to appeal to cooperative stakeholders’ psychological motives.

The commitment of customer-owners is assumed to be stronger when their own co-operative contributes extensively to the welfare of the society. In other words, the responsible operation of the co-operative produces additional value to its customer-owners. As put forward in our data: “Social responsibility is seen as a natural part of the value basis of S Group and the principles are well employed in different operational programs in various units. The goal is to produce additional value to the committed customerowners through the management of economical, social and environmental information.” Appealing to stakeholders’ emotions by means of discourse in publications may not be entirely altruistic. That is, it may simply be part of a strategy which aims at constructing a more “positive” image of the group and, thus, create competitive advantage to the cooperative (cf. Knox & Maklan, 2004). However, when it is made to increase member commitment, the focused communication may also be considered as a practice consistent with co-operative philosophy (cf. MacPherson, 1995).

The role of stakeholders in S Group’s operations Accounts of stakeholders in S Group’s publications seem to be consistent with the definitions given in literature on social responsibility and stakeholder management (e.g., Freeman & Reed, 1983). As put forward in our data: “Stakeholders are defined as all of those parties which have something to do with S Group or to whom the S Group effects or which have impact on the operations of S Group. Collaboration [with the stakeholders] may be based on economical, ideological or some other interests. Stakeholders may therefore have a direct relationship with the group - as employees or customer-owners. Stakeholders have always some kind of expectations of the operations of the enterprise.” The normative view on stakeholders (e.g., Donaldson & Preston; Carroll, 1989) focuses to on the question of: “Why should an enterprise pay attention to its stakeholders?” According to our data, the cooperational form of business sets its own demands in regard to the prioritization of stakeholders. In our S Group co-operatives, various stakeholder-groups are considered highly important, for example, because of high interdependence. Many regional stakeholders share co-operative’s destiny. Co-operatives are

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

53

SOCIAL RESPONSIBILITY

tentative especially to their customer-owners, who are the basis of their existence. Also employees are also highly important stakeholders to S Group (George, 2003). S Group co-operatives have succeeded well in national employee satisfaction competitions. According to our data the tentative approach to employees is a great asset of co-operatives. It is considered to help co-operatives to become better places to work, but to operate more efficiently and produce better quality services. The instrumental view on stakeholders (e.g., Donaldson & Preston, 1995; Aupperle et al., 1985) focuses on the question of “How much stakeholders effect the operation of the enterprise?” As the customers are also owners of the enterprise, they are able to have voice in the co-operative in many ways (e.g., via customer feedback, personal relations, governance etc.) and therefore produce outcomes on the operations of their co-operative. According to our data, the operations of the S Group are also effected, for example, by local and national authorities and decision-makers, EU-authorities, consumer and environmental organizations, international organizations and national as well as international competitors.

The relationship between the stakeholders and perspectives of responsibility S Group has strengthened its stakeholder-relationships during the last ten years, when the corporate social responsibility has emerged to a highly important role in Finnish media. By reporting its long-term responsibility, S Group can achieve a more favorable image among its stakeholders. The stakeholderrelationships have become particularly strong when examined locally and regionally. According to our analysis, this may an outcome of the significant role of locality and regionality in various responsibilitydiscourses in S Group’s publications. Regionality has been presented along three other perspectives (economical, social, and environmental) of responsibility. The concept of “regional responsibility” is efficiently put into practice in the operations of regional co-operatives: “The strength of responsibility in S Group is its regional structure. Regional co-operatives understand the features of their regions, preferences of their customer-owners and they enhance the stable development of their regions through their operations. Regional co-operatives are strong influencers in their regions as their 54

decision-making is local and they are governed by their own customer-owners.” The accounts put forward in our data seem to be consistent with, for example, George’s (2003) ideas on the high importance of recognizing the surrounding society as a group of stakeholders. In various communal settings of our study, local citizens are interpreted to be interested about the new jobs and tax revenues which the enterprises bring to the region. According to our data, CSR of the regional cooperatives have many welcomed “effects” on their regions. The ethical and responsible operations of cooperatives are considered to increase trust between cooperatives and its business partners as well as other stakeholders and to bring conformity and predictability to their operations (Vehkaperä, 2003). That is, the CSR of S Group was considered as a “trust building mechanism”. As put forward in our data: “All our operation and collaboration with different stakeholders are based on trust. Our operation is open, honest and trustful. We carry responsibility of our employees´ welfare, the safety of our operation and the welfare of the citizens and the environment in our region.” The precondition for the generation of trust between regional citizens and S Group is the open dialogue between the co-operatives and their stakeholders. Stakeholder-communication may be employed as a means of increasing both customer-owners’ and employees’ commitment to the co-operative.

Conclusion The aim of our study was to understand how the concept of corporate social responsibility is constructed and how it is interconnected with stakeholders in various archival materials of our case organization (S Group). By employing qualitative analysis on our data, we found four discourses which emerged in the publications of S Group. Fig. 2 presents these discourses which are employed to construct S Group’s CSR and its stakeholdermanagement: “Co-operative’s involvement in peoples’ everyday life” - discourse describes co-operatives as a longlasting and stable actors, which are prepared to change their operations according to the changes of the society and operational environment. In this discourse, the co-operative is presented as a trustful partner who doesn’t abandon its principles even when facing difficult times. The publications of S Group appeal also to people’s emotions. For example, they emphasize

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

SOCIAL RESPONSIBILITY

CO-OPERATIVE’S EVERYDAY LIFE

INVOLVEMENT

IN

PEOPLES’

• Long history of responsibility • Responsibility in changes of society • Continuity

CO-OPERATIVE AS A REGIONAL ACTOR • Regionality • “Human faced” business • Domestic values • Trust

• Appealing to emotions CO-OPERATIVE AS A SERVANT OF CUSTOMEROWNERS • Customer-owners and employees are the most important stakeholders. • Responsibility as a producer of additional value to customer-owners

CO-OPERATIVE AS A PROFIT-MAKING ACTOR • Responsibility as part of “normal operation” • Principles of economical responsibilities • Profitability of the operation

• Responsible action together with the stakeholders of S Group. Fig. 2: The discourses of responsibility and stakeholder –management in S Group that the S Group has been with and for Finnish people under the time of war and reconstruction in Finland. “Co-operative as a regional actor” -discourse emphasizes the importance of regionality in S Group. For example, regional co-operatives understand well the needs and preferences of customer-owners and other stakeholders of their region and are actively involved in many local activities. “Co-operative as a servant of customer-owners” discourse focuses on S Group’s collaboration with cooperatives’ most important group of stakeholders their customer-owners. In this discourse, the expectations and needs of customer-owners are considered as vital for the successful operation and business of S Group. In addition, actions and goals of S Group are justified - in the archival materials - by emphasizing that they produce additional value to customer-owners. What is typical to “Co-operative as a profit-making actor” -discourse is that the economic responsibility finds its rationale and justification in other goals and responsibilities that co-operatives carry along economic responsibilities. Consistently with previous research on CSR (e.g., Windsor, 2006; Carroll, 1979; Davis, 1973), we found that the CSR of S Group includes economic, social and environmental dimensions. However, we also found that in S Group another dimension could be added, which unifies the above mentioned dimensions. According to our data, the so called “regional responsibility” is in the core of S Group’s CSR. On the regional level, this notion is consistent

with Nilsson’s (1994) statements in that co-operatives emphasize the welfare of the entire society in their actions and decisions. Finnish discourses of CSR are typically divided into four different levels which emphasize either the benefit of an enterprise, owner, all stakeholders or the benefit of the entire society (Vehkaperä, 2003). In our study we found that in S Group the benefit of the entire society was also emphasized. In this discourse, the enterprise questions profit maximization as the primary mission of the enterprise - it considers its mission is to increase the welfare of the society and not only its owners. This paper is a preliminary attempt to integrate the perspectives in research on corporate social responsibility, co-operation and stakeholder management and our evidence is based on limited data. Our findings do suggest that further investigations would be worthwhile. For future research it should be interesting to follow, for example, how the CSR of S Group co-operatives is understood by various stakeholders in different geographical regions. In addition, it would we interesting to use comparative analysis and compare the actions of responsibility in S Group and in a competitor’s company. There is also the need to reflect on the implications of some aspects of our reseach for the context of globalization and the growing evidence from research in other countries of the special competencies the co-operative social dimension provides for their competitive strategy as a business and as an association.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

55

SOCIAL RESPONSIBILITY

References Books Carroll, A. B. (1998). Stakeholder thinking in three models of management morality: a perspective with strategic implications. In the Corporation and its Stakeholders. Classic and contemporary readings. Toronto: University of Toronto Press.

corporate social responsibility and profitability. Academy of Management Journal, 28, 448-463. Berman, S. L., Wicks, A. C., Kotha, S., & Jones, T. M. (1999). Does stakeholder orientation matter? The relationship between stakeholder management models and firm financial performance. Academy of Management Journal 42, 488-506.

Carroll, A. B. (1989). Business and society: Ethics and stakeholder management. Cincinnati, OH: South-Western.

Carroll, A.B. (1979) A three-dimensional conceptual model of corporate performance. Academy of Management Review, 4, 497-505.

Carroll, A. B. (1981). Business & society. Managing corporate social performance. Boston: Little, Brown and Company.

Davis, K. (1973). The case for and against business assumption of social responsibilities. Academy of Management Journal, 13, 312-322.

Freeman, R. E. (1984). Strategic management. A stakeholder approach. University of Minnesota, Pitman.

Davis, P. (2001). The Governance of Co-operatives Under Competitive Conditions: Issues, Processes and Culture. Corporate Governance, 1, 28–39.

Friedman, M. (1962). Capitalism and freedom. Chicago: University of Chicago Press. Johnson, P., & Smith, K. (1996). Business ethics and business behavior. London, International Thomson Business Press. Laurinkari., J. (2004). Osuustoiminta - Utopiasta kansainvälisen yrittämisen muodoksi. Pellervo-Seura. Suomen Graafiset palvelut Oy, Kuopio. Lincoln, Y. S. (2005). The Sage handbook of qualitative research, Thousand Oaks (CA): Sage Publications. Laidlaw, A. F. (1981). Osuustoiminta vuonna 2000. Yhteiskirjapaino. MacPherson, I. (1995). Co-operative Principles for the 21st Century. ICA, Geneva. Münkner, H. - H. (1981). Co-operative Principles and Cooperative Law. ,Marburg/Lahn: Institute for Cooperation in Developing Countries. Neilimo, K. (2006). Your Own Store. Keuruu: SOK. Skurnik, S. (2005). Transformation of the Finnish Business System - From a closed regulated economy into a bipolar globalized economy. Acta Universitatis Oeconomicae Helsingiensis, A-251, Helsinki, Helsinki School of Economics. Talvio, C., & Välimaa, M. (2004). Yhteiskuntavastuu ja johtaminen. Helsinki: Edita Publishing Oy. Vehkaperä, M. (2003). Yrityksen yhteiskuntavastuu – vastuuta voittojen vuoksi? Lisensiaattitutkielma N:O 135/2003. Jyväskylä: Jyväskylän yliopisto, taloustieteiden tiedekunta. Journals Agle, B. R., Mitchell, R., & Sonnenfeld, J. (1999). Who matters to CEOs? An investigation of stakeholder attributes and salience, corporate performance, and CEO values. Academy of Management Journal 42, 507-525. Aupperle, K. E., Carroll. A. B., & Hatfield, J. D. (1985). An empirical examination of the relationship between

56

Donaldson, L., & Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and shareholder returns. Australian Journal of Management. 16, 49-64. Donaldson, T., & Preston, L. E. (1995). The stakeholder theory of the corporation: concepts, evidence and implications. Academy of Management Review, 20, 65-91. Epstein, E. M. (1987). The corporate social policy process: beyond business ethics, corporate social responsibility and corporate social responsiveness. California Management Review, XXIX, 99-114. Freeman, E. R. & Reed, D. L. (1983). Stockholders and stakeholders: a new perspective on corporate governance. California Management Review, 25, 88-106. George, B. (2003). Managing stakeholders vs. responding to shareholders. Strategy & Leadership, 31, 36-40. Hansmann, H. (1999). Co-operative Firms in Theory and Practice. The Finnish Journal of Business Economics, 4, 387–403. Hart, S. (1995). A natural resource-based view of the firm. Academy of Management Review, 20, 986-1014. International Co-operative Alliance, (1995) Statement of Cooperative Identity, Geneva. Jennings, P., & Zandbergen, P. (1995). Ecologically sustainable organizations: an institutional approach. Academy of Management Review, 20, 1015-1052. Knox, S., & Maklan, S. (2004). Corporate social responsibility: moving beyond investment towards measuring outcomes. European Management Journal, 22, 508-516. MacPherson, Ian (1995) Co-operative Principles in Review of International Co-operation, Vol. 88, No. 4, International Cooperative Alliance, Geneva, p21. McGuire, J. B., Sundgren, A., & Schneeweis, T. (1988). Corporate social responsibility and firm financial performance. Academy of Management Journal, 31, 854-872.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

SOCIAL RESPONSIBILITY

McWilliams, A., Siegel, D., & Wright, P. M. (2006). Guest editor’s introduction: corporate social responsibility: strategic implications. Journal of Management Studies, 43, 1-18.

S Group (2006). [Internet document] [accessed on 8.11.2006] Available at: http://www.skanava.fi/sryhma.do?sectionid=765556302&lang=1

Meyer, J. & Rowan, B. (1977). Institutionalized Organizations: Formal Structure as Myth and Ceremony, American Journal of Sociology, 83, 340-363. Mizruchi, M. & Fein, L. (1999). The Social Construction of Organizational Knowledge: A Study of the Uses of Coercive, Mimetic, and Normative Isomorphism, Administrative Science Quarterly 44, 653-683. Mitchell, R., K., Agle, B., R., & Wood, D. J. (1997). Toward a theory of stakeholder identification and salience: defining the principle of who and what really accounts. Academy of Management Review, 22, 853-886. Murray, K. B., & Vogel, C. (1997). Using a hierarchy-ofeffects approach to gauge the effectiveness of corporate social responsibility to generate goodwill toward the firm: Financial versus nonfinancial impacts. Journal of Business Research, 38, 141-159. Nilsson, J. (1996) Organisational principles for co-operative firms. Scandinavian Journal of Management, 17, 329-356. Smith, H., J. (2003). The shareholders vs. stakeholders debate. MIT Sloan Management Review, 44, 85–90. Tuominen, P.; Jussila, I., & Saksa, J-M. (2006). Locality and Regionality in Management of Finnish Customer Owned Cooperatives, International Journal of Co-operative Management, 3, 9-19. Van Marrewijk, M. V. (2003). Concepts and definitions of CSR and corporate sustainability. Between agency and communion. Journal of Business Ethics, 44, 95-105. Windsor, D. (2006). Corporate social responsibility: three key approaches. Journal of Management Studies, 43, 93114. Wood, D., J., & Jones, R. E. (1995). Stakeholder mismatching: a theoretical problem in empirical research on corporate social performance. The International Journal of Organizational Analysis, 3, 229-267. Miscellaneous Brenner, S. N., & Cochran. P. (1991). The stakeholder theory of the firm: Implications for business and society theory and research. Paper presented at the annual meeting of the International Association for Business and Society, Sundance, UT. Friedman, M. (1970). The social responsibility of business is to increase its profits. New York Times Magazine, September, 13. Kotonen, U., Tuominen, P. & Jussila, I. (2007). The Role of Co-operatives in Regional Development: A Qualitative Analysis of Finnish Cases. Presented at the 46th Annual Meeting of Western Regional Science Association, Newport Beach, California (USA), February, 2007.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

57

CREDIT UNION SUPERVISION

An alternative approach to oversight: the case of the supervisory committee in Irish credit unions Noreen Byrne, Olive McCarthy and Michael Ward

Abstract

savings under the supervision of credit union supervisory committees.

The credit union supervisory committee, as a distinct model of organisational oversight, is very much invisible within corporate governance research. The focus is almost entirely on its corporate counterpart, the audit committee. This means that best practice is based almost entirely on audit committee experience, even though the audit committee model has not always prevented large-scale corporate losses. Audit committee and corporate and co-operative governance literature may benefit from the perspective of alternative models, such as that of the credit union supervisory committee. This paper explores the role of the supervisory committee in credit union governance and the structure of supervision, oversight and regulation within the Irish credit union movement. It reports the findings of a survey of credit union supervisory committees and qualitative interviews with key players in credit union supervision and development in Ireland, including the regulators of the credit union movement. A profile of the composition, activities and skills levels of supervisory committees is examined. The findings show that it is the high level of activity of the supervisory committee and its clear-cut independence that set it apart from other organisational oversight models.

Key words Audit Committees, Credit Unions, Governance, Regulating Financial Services, Supervisory Committees.

Introduction The credit union supervisory committee, as a model of organisational oversight, is very much invisible within corporate governance research, where the focus is almost entirely on its corporate counterpart, the audit committee. Thus, best practice is based almost entirely on audit committee experience. This is despite the existence of over 40,000 successful credit unions worldwide, safeguarding US$600 billion in member 58

Given the changing nature of regulation of credit unions in Ireland, the role and value of the supervisory committee is coming under increased scrutiny, particularly as a result of its increased importance under the 1997 Credit Union Act. In the Republic of Ireland (RoI) alone, there are over 400 credit unions with ?7 billion in member savings, and all credit unions are required by legislation to elect from their membership a supervisory committee charged with ‘the general duty of overseeing the performance by the directors of their functions’ (Credit Union Act 1997, S.58 (1)). The Irish Financial Services Regulatory Authority (IFSRA)1 has expressed the view that credit union supervisory committees should develop along the lines of the audit committee model. With the abundance of research and best practice guidelines on audit committees, compared with little or no research on supervisory committees, this is hardly surprising. Therefore, the authors are of the view that it is important to examine the value of the supervisory committee model before any drastic changes are made to its structure and practices. This paper explores the role of the supervisory committee in credit union governance and presents a comparison with the audit committee model. It reports the findings of a survey of credit union supervisory committees and qualitative interviews with key players in credit union supervision in Ireland. In order to compare the audit committee and supervisory committee models, the authors draw on past audit committee research. It is hoped that this paper will be a useful starting point for further research into the Supervisory Committee model of organisational oversight while also presenting an alternative model to that of the audit committee in corporate governance literature.

The corporate audit committee The corporate audit committee is an internal control or monitoring body in an organisation. According to Collier (1997:74), they have ‘responsibility for

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CREDIT UNION SUPERVISION

reviewing the financial statements and the accounting principles and practices underlying them, liaising with the external and internal auditors, and reviewing the effectiveness of internal controls’. The audit committee is now recognised has having a central role to play in good corporate governance. This has led many of the corporate governance guidelines and codes such as those produced by Cadbury (1992), Higgs (2003) and Smith (2003) to focus on strengthening the role of the audit committee. The Irish Companies (Auditing and Accounting) Bill (2003) requires all public companies (whether listed or not) and all large private companies to have an audit committee (Devlin, 2003:25). Much of the corporate governance literature also focuses on audit committees. The following quotes give a flavour of some of the views in the literature: ‘One of the many lessons from the still unfolding Enron scandal is the critical role of audits and the trouble that can befall an organisation when its audit committee is not doing its job’. Reed (2002, p40) ‘Recent events in the U.S. economy have organisations scrambling to ensure they have all the right pieces in place to avert financial disaster. Many are discovering that one of the most important is a strong audit committee’. Verschoor (2002, p26) The audit committee model, however, has not prevented recent corporate losses (such as those in Barings, Enron, AIB/First Maryland). Some observers (Sweeney 2002; Spira 1999; Collier 1997) refer in particular to its lack of independence as a key factor in the weaknesses of this committee. Most literature and corporate governance reports grapple with the notion of independence and rarely make clear recommendations in this regard. On one hand, independence is seen as essential to effective oversight (Verschoor 2002; Spollen 1997), while on the other, it is viewed as potentially damaging, where separation between the board and audit committee might result in difficult tensions within the organisation (Smith 2003). The 1992 Cadbury Committee, in reporting on corporate governance, defined audit committee independence as being ‘freedom from company connection or relationship which might interfere with the exercise of independent judgement’ (Spira 1999:263). In corporate companies, the audit committee operates as a sub-committee of the board and is comprised of non-executive directors. In this

respect, the board can exercise some control over the audit committee and can decide who its members are. The members of the audit committee, as nonexecutive directors, can also participate in corporate decision-making. It is this ‘blurred distinction’ (Smith 2002:25) between roles that often causes confusion and lack of trust among shareholders and undermines responsibilities. Another weakness raised is the level of relative inactivity of many audit committees, where they only meet four times per annum, which as Healy and Palepu (2002) suggest, translates into only a few hours in the year. Our findings later show that credit union supervisory committees meet regularly, with many meeting on a weekly basis. Healy and Palepu (2002) also criticise audit committee members for their often modest background in finance and accounting. DeZoort (1997), in a review of relevant literature, states that: ‘Findings in this area indicate that, while expertise and experience in oversight areas are perceived as critical components of overall committee effectiveness, they are lacking for many audit committee members.’ DeZoort (1997, p213) Sweeney (2002,) confirms the earlier findings by DeZoort (1997). ‘Audit committee ineptitude, in particular, is generally acknowledged to be among the principal reasons why shareholders suffered billions of dollars in losses over the last year or so’. (Sweeney,2002, p16) Smith (2003) states that at least one member of the audit committee must have ‘significant, recent and relevant financial experience…It is highly desirable for this member to have a professional qualification from one of the professional accountancy bodies’. (Smith, 2003, p9) Smith goes on to state that there should be an induction programme for new committee members and that training should be provided to all audit committee members on an on-going and timely basis. These sentiments are echoed in the Higgs Report (2003). So while active, experienced and trained audit committees are now seen as an essential element of good governance in corporate companies, the jury is largely still out with regard to the operational definition of independence.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

59

CREDIT UNION SUPERVISION

The credit union supervisory committee The supervisory committee in a credit union has a similar function to that of an audit committee. In Irish credit unions, it is a statutory committee, established by the Credit Union Act (Republic of Ireland) 1997. It is elected from among the members of the credit union, by the members of the credit union, and is responsible to the credit union membership. The committee consists of three or five members, all of whom work in a voluntary capacity and represent the interests of the general membership. The primary function of the committee is to oversee the performance of the credit union directors. The Supervisory Committee normally attends all board meetings but does not participate in decision-making. Thus, its independence from the board is secured. Supervisory committees came into being at an early stage in credit union development, as early as the Raiffeisen movement of the late 1800si. Possibly one of the reasons Irish credit unions adopted the idea of a supervisory committee was because the agricultural credit societies and village banks failed in the early 1900s partly as a result of ‘inadequate control procedures’ (Quinn, 1999:13). It seems credit unions were intent not to repeat the same mistakes. The supervisory committee, as an independent entity, seems to be the most popular model of organisational oversight used in credit union movementsii. As indicated earlier, the credit union

supervisory committee model does not appear to have played any role in the development of corporate governance theory or practice. Even within credit union circles, there is little focus on supervisory committees. However, within the corporate sector, audit committees are now seen as a key ingredient in a good corporate governance structure.

Credit union governance structure Individual credit union The governance structure in a credit union is comprised of four main elements: the membership at the AGM, the board of directors, the supervisory committee and the salaried management. As Figure 1 below depicts, the supervisory committee performs the pure oversight role in the credit union. The key issue in governance is that in most organisations, including credit unions, there is a degree of separation between those who own the organisation and those who manage the organisationiii. Thus, there must be an oversight function of some sort in organisations to ensure that management always acts in the interests of the owners. In corporate companies, this role is performed by the non-executive directors and the audit committee. In credit unions, the board of directors perform an executive, and to a lesser extent, an oversight function. The supervisory committee in the credit union performs a pure oversight role.

Elects Membership (at AGM)

Elects Supervisory Committee (Oversight)

Oversees

Board of Directors (Policy and Direction)

Oversees/works in partnership with the manager Manager (Daily management of the credit union staff)

Figure 1 Corporate Governance Structure in Credit Unions. Adapted from Branch & Baker, 2001 60

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CREDIT UNION SUPERVISION

Figure 2 Credit Union Supervision

IFSRA

ILCU Monitoring

Registrar of Credit Unions

(future monitoring role of ILCU is unclear)

Credit Union Organisation Supervisory Committee

Board of Directors

External auditors

GENERAL ASSEMBLY OF MEMBERS

The role of the supervisory committee within the overall regulation of credit unions is as an internal regulator. Credit union movement There is a number of layers of supervision and oversight in the credit union movement. The ultimate supervisory authority is IFSRA, which, as a result of intense lobbying by the Irish League of Credit Unions (ILCU)iv, has a dedicated Registrar of Credit Unions to regulate credit unions. The ILCU also acts as a monitoring body. It employs a number of field officers who visit credit unions and monitor their books and operations. (The precise monitoring role the ILCU will play into the future is unclear at the present time, as it may be taken over by IFSRA.) The regulatory structure diagrammatically in Figure 2.

is

presented

The research The research conducted consisted of both a quantitative and qualitative research methodology. The quantitative element comprised of a survey with 125 supervisory committee members from 39 Irish credit unions. These surveys were administered face to face and focused on the

composition of the committee. The authors draw a comparison with the audit committee model in terms of compositional factors. The qualitative element of the study involved interviews with a number of key witnesses who are involved in credit union supervision, development and regulation. These interviews focus on the key issues of the role of the supervisory committee, skills required by supervisors and on whether the committee should remain fully independent or develop along the lines of the audit committee model.

Findings – Survey A profile of the individual supervisor in terms of age and gender is first presented. This is then followed by aggregated data on the committee as whole, in terms of composition. General profile of the individual supervisor The research presents an overall profile of the individual who volunteers their time to the credit union as a supervisor. The most striking characteristic is that supervisors tend to be male and over 44 years of age (See Figure 3). The numerical dominance of males on supervisory committees was also found by McKillop et al (2002).

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

61

CREDIT UNION SUPERVISION

Figure 3 Profile of individual supervisor

members need time to gain experience and the benefit of a historical perspective. Eighty percent of the surveyed supervisory committees consist of members with previous credit union experience in some other capacity, as board member, sub-committee member, or staff member. This is a positive finding given that a good understanding of the business is essential to the effective operation of a supervisory committee. It is also interesting to note that 90% of committees have at least one member with relevant supervisory committee training. It is interesting to compare this with training provided for audit committees.

Thus, it could be suggested that for regeneration and for representational purposes, supervisory committees should attempt to have greater balance in their membership. Committee composition In order to determine the committee composition, we aggregated the data and examined each supervisory committee. The results are present in Table 1. While the Table only focus on the supervisory committee, we compare the results with audit committee research and suggested best practice. Table 1 indicates that credit union supervisory committees are numerically dominated by male members. As the authors are not aware of any gender research on corporate audit committees, it was not possible to make a comparison between the supervisory committee and the audit committee on this factor. In terms of length of service on the committee, 82% of committees have one or more members in at least their second term of service. This suggests a strong level of experience on these committees. 18% of committees are in their first term. It could be suggested that these committees are inexperienced and have the disadvantage that they lack the guidance of more experienced members. PricewaterhouseCoopers (2000) point out that committees must consider both continuity and the desirability of fresh perspectives for their development. They state that ‘rapid turnover can be detrimental to the committee’s effectiveness’ since 62

The American Society of Corporate Secretaries (ASCS), in its 1998 survey on audit committee effectiveness, found that only 6% of 550 public companies provide formal training to their audit committee members. The ILCU runs specific courses for supervisory committee members. 64% of supervisory committees surveyed have at least one member with accounting experience and/or qualifications. Smith (2003) recommends that there should be at least one member who is financially literate on the corporate audit committee. The aforementioned audit committee survey carried out by the ASCS found that 74% of respondents had at least one audit committee member who had a finance or accounting background (PriceWaterhouseCoopers, 2000). The credit union supervisory committee, at 64%, compares less favourably. The research found that all the supervisory committee members work on a voluntary basis. This differs significantly from the corporate audit committee which is remunerated for its time. Supervisory committee members must be members of the credit union and must not hold a directorship or be an employee of the credit union. This helps to ensure independence and objective judgement. This differs from the audit committee where directors (independent and not) can be members of the audit committee. All the supervisory committees studied were elected by the membership of the credit union and are an independent entity from the board of directors. This differs from the audit committee selection methods. The Public Company Governance Survey (19992000) carried out by the National Association of Corporate Directors found that in 41% of companies the audit committee members are chosen by the full board and in 35% are chosen by the CEO and/or the board chair (PriceWaterhouseCoopers, 2000).

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CREDIT UNION SUPERVISION

Supervisory Committee Composition

Gender • All/majority male • All/majority female Length of Service • All members in their 1st term (3 years and less) • At least one or more members in their second term or more Previous CU experience • No previous credit union experience on the committee • At least one or more members with previous credit union experience Participation in relevant supervisory committee training • No supervisory committee training received by the committee • At least one or more members who have participated in supervisory committee training Formal accounting experience and/or qualifications • No formal accounting experience and/or qualifications • At least one or more members on the committee with accounting experience and/or qualifications Remuneration • All supervisory committee members work on a voluntary basis Independence of the committee • All members of the supervisory committee are elected by the membership (shareholders) of the credit union. • There are no credit union directors, employees or other credit union committee members on the supervisory committee

78% 22%

18% 82%

20% 80%

10% 90%

Unlike corporate audit committees, supervisory committees are observers at an operational as well as a strategic level in credit unions. This ensures that they are close to the everyday, operational activities of the credit union, are familiar with the staff members and can build positive relationships with management. They also attend all board meetings as observers and can easily be familiar with decisions made and the rationale behind them, while retaining the committee’s independence. The on-going interaction at both of these levels of the organisation may enable supervisory committees to recognise and deal with a potential difficulty or issue early and before they can develop into more serious problems. In reporting to the board, the supervisory committee can make recommendations to the board for improving performance. While these are not binding, they are also a useful measure of committee activity. Figure 4 shows the level of activity of supervisory committees in terms of recommendation-making.

36% 64%

100%

100%

100%

Table 1, Compositional Profile of Supervisory Committees Activity level of the committee Supervisory committees meet approximately 40 times or more in the year to carry out on-going spot checks on the general operations of the credit union. In addition to these meetings, supervisory committees are required to meet four times a year with the board, in the absence of salaried management, to report on the performance of the board. In contrast, the corporate audit committees normally meet on a quarterly basis. They also attend all monthly board meetings. It might be argued that twelve board meetings, versus four audit committee meetings, might well leave non-executive directors with a greater sense of their duties on the board rather than their responsibilities as audit committee members.

Figure 4, Supervisory committee recommendationmaking to the board

The majority (67%) of the studied supervisory committees make recommendations to the board. However, a significant 33% claim not to make recommendations. Why do some committees make recommendations and others do not? To attempt to answer this, we cross-tabulated supervisory committee composition with the tendency to make recommendations to the board. The results of these cross-tabulations are presented in Table 2. While none of the above results are significant at the p< 0.05 level, there would appear to be a slightly greater tendency for those committees which are male dominated, those with longer serving members and those with previous credit union experience to be more active in making recommendations to the board.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

63

CREDIT UNION SUPERVISION

Supervisory Committee Composition

Gender • All/majority male • All/majority female Length of service on committee • All members in their first term (3 yrs or less) • At least one or more members in their second term or more Participation in supervisory committee training • None of the members have participated in supervisory committee training • At least one or more members have participated in supervisory committee training Previous credit union experience • No previous credit union experience on the committee • At least one or more members with previous credit union experience

Formal accounting experience and/or qualifications • No accounting experience and/or qualifications • At least one or more members with accounting experience and/or qualifications

Committees which make recommend ations to the board of directors

21 (72%) 4 (44%)

3 (43%)

Findings – Key witness interviews Chi Square Result P< 0.05

.122

.140

23 (72%)

2 (50%)

.455

.262

22 (71%)

9 (64%)

.813

17 (68%)

Table 2, Cross-tabulations of supervisory committee composition and recommendation-making to the board It is important to remember that the sample size was small, being only 39 credit unions. An extension of the sample size in future research may alter the statistical significance of the findings. The findings of the survey indicate that the credit union supervisory committee composition and structure compares favourably with the best practice guideline set out for audit committees. In some cases the supervisory committee outperforms the audit committee, particular in terms of its level of activity, independence and participation in specific training. However, it compares less favourably in terms of financial expertise. The next section of this paper will examine the views of a number of key witnesses from the credit union movement, including the financial regulatory body (IFSRA). 64

The interviews covered a number of areas, including the role and perceived skills of supervisory committees and the independence of the supervisory committee. Role of the supervisory committee

24 (69%)

4 (50%)

Ten key witnesses were interviewed from the following organisations: ILCU, Credit Union Development Association (CUDA), IFSRA, former Registrar of Friendly Societies, Credit Union Supervisors’ Forum as well as other individuals who are deeply involved in the work of supervisory committees.

Many of the key witnesses felt that there was often confusion in the minds of both the supervisory committee and the board of directors about their respective roles. The general agreement was that the supervisory committee must confine its role to oversight only. A quote from one of the key witnesses summarises this point: “Supervisory committees do not have any role in the running of the credit union, they cannot influence board decision making, cannot voice an opinion, but can make a point of order/or a point of information…supervisory committees must know how far they can go and must not go beyond this point.” One other key witness stated that “on occasions, supervisors become involved in policy making and that this causes tension and problems in the credit union”. Another key witness indicated that the supervisory committee and the board often only become aware of supervisors’ roles when there is a difficulty in the credit union –“from this comes more understanding and possibly respect from the board about the role of the supervisory committee”. If this is the case, it is unfortunate that the credit union has to experience some turbulence before the role of the supervisory committee is fully recognised. Skills required The key witnesses were in general agreement about the important skills required on a supervisory committee. These are listed as follows in the general order of importance: 1. Common Sense 2. Human resources or people skills 3. Financial skills 4. Independence, sound judgement and the ability to ask constructive questions

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CREDIT UNION SUPERVISION

5. A clear understanding of roles 6. The ability to view the overall picture and not simply focus on the routine aspect of their work Almost all key witnesses felt that supervisors need common sense primarily, and then specialised knowledge. A quote from one key witness summarises that view: “A supervisory committee can have all the financial skills and qualifications but if it does not have common sense and people skills then this committee will not be effective.” However, in saying that, many of the key witnesses highlighted that a major shortcoming in many supervisory committees is a lack of financial knowledge. It was also suggested by some of the key witnesses that supervisory committees may have a tendency to over-focus on certain elements of their work while ignoring other areas. Spollen (1997) alludes to this tendency when he says that sometimes the internal control function in a company tends to over focus on the areas known best and on simpler routine tasks while ignoring the more complex areas of the organisation. One key witness summarises this point as follows: “Some supervisors will put all their effort into balancing the bank reconciliation down to the last cent. When the organisation has assets of several million, supervisors must be able keep their work in context and see the overall picture.” Supervisory committee as an independent entity Some of the key witnesses feel that the supervisory committee, as an independent entity, can create tension in credit unions. These key witnesses feel that the committee should become a sub-committee of the board similar to the audit committee in corporate companies. In Ireland, the statutory independence of the supervisory committee has, in fact, increased. In the Credit Union Act 1966, one director could sit on the committee. The 1997 Credit Union Act changed this to ensure that no director could be a member of the committee. It was felt by the drafters of the 1997 Act that a supervisory committee which contains directors ‘defies logic’ in that it does not make sense for a board director to be responsible for reviewing board performance. While the Irish legislation is strengthening the role of the supervisory committee, other credit union legislation from around the world would appear to

have weakened the role of the supervisory committee. Of 104 summary credit union legislations from around the world, only 10 mention the supervisory committee. While this may be so, the World Council of Credit Unions (WOCCU) has kept the concept of the independent supervisory committee to the fore in its model law for credit unions. Should the supervisory committee remain an independent entity or should it be a sub-committee of the board? The view from the majority of the key witnesses was that the supervisory committee should remain independent of the board. Many felt that this independence was the key to its effectiveness. It was felt that this independence would only result in tensions between the board and the supervisory committee if both parties were unclear of their roles and responsibilities. Perhaps the real issue underlying that of independence is clarity of role. In the corporate governance codes and literature, there appears to be a pre-occupation with the importance of independence, although precise definitions are not always forthcoming. Spira (1999) indicates that substantial emphasis is placed on independence in Cadbury (1992), which she says implies that “independence is a prerequisite for ethical behaviour in the context of corporate governance”. In fact, Higgs (2003), Smith (2003) and also Cadbury (1992) recommend that at least half of the board should be made up of non-executive directors. However, the non-executive directors also sit on the board and are involved in decision-making. This has led a number of commentators (Spira 1999, p263, Collier 1997, p80) to highlight the conflict for the nonexecutive director in trying to carry out a decisionmaking role and a monitoring role at the same time. Spira (1999, p263) has indicated that the corporate governance codes have not sufficiently dealt with this dilemma. O’Higgins (2003, p32) highlights that this may result in a ‘latent threat’ to the unitary nature of the board. Under the Stock Exchange’s Combined Code, nonexecutive directors on an audit committee should be ‘independent of management and free from any business or other relationship would could materially interfere with the exercise of their independent judgement’. However, because the audit committee is a sub-committee of the board and its members therefore also sit on the board, independence can be difficult. Vicknair, Hickman and Carnes (cited in Collier 1997) have raised doubts about the impartiality of ‘grey’ area directors, who are ‘not wholly independent of management’ and who may undermine the position

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

65

CREDIT UNION SUPERVISION

of audit committees as ‘truly independent corporate governance entities’.

Notes i

The original legal framework for credit unions, the Cooperative law (1868,1871) paragraph 38 (I) stated ‘It is the task of the Supervisory Board (Verwaltungsrat, Aufsichtsrat) to supervise the Executive Board (Vorstand) in their management in all branches of the administration…’ (cited in Raiffeisen, 1970:55)

ii

The English-Canadian credit union movement has adopted the corporate model of the audit committee which operates as a sub-committee of the board rather than as an independent entity.

Thus, if independence and impacts on the unitary board are issues in corporate companies, perhaps it is better to have a group separate to the board who, if carrying out their role in an effective and clearly understood way, are truly independent and do not affect the unitary function of the board.

Conclusions The supervisory committee model may well be a useful alternative model to the corporate audit committee model for organisational oversight. Its clear and unequivocal independence from the board overcomes one of the main, widely recognised shortcomings of the corporate model. The high level of activity of the Supervisory Committees surveyed challenges the socalled cavalier approach of many audit committees. This can be explained, at least in part, by the prior experience and regular training of committee members, factors which are deemed to be important in the literature, as well as the clear understanding of their role. It might also be accounted for by the fact that committee members receive no remuneration to fulfil their duties, which may indicate a commitment to the organisation and its members that goes beyond any pecuniary interest. The supervisory committees surveyed are not without their faults. Their numerical dominance by males must be addressed. Their weakness relative to audit committees in terms of financially qualified members must also be tackled through revised recruitment and professional training strategies. As already indicated, this research was restricted by the lack of literature on credit union supervisory committees and credit union regulation. It is also limited in that it does not delve into the many complex issues which impact on supervisory committees, such as the psychological dynamics between the committee and the board/management, the issue of volunteer commitment to credit unions, and the levels of trust between members and their supervisory committee. However, it is also disappointing to see that the audit committee research does not appear to cover these types of issues to any great extent either. It is the hope of the authors that this research will be the foundation of more in-depth research in the future. Such research is important as it helps those outside the credit union and co-operative world to better understand these unique and important organisations. 66

iii In the case of the credit unions, the members own the organisation but they elect a board to run the organisation on their behalf. iv The largest umbrella body for Irish credit unions.

References Books Cadbury, A. (1992) The Financial Aspects of Corporate Governance – a report of the committee on corporate governance. London: Gee and Co. Collier, P. Corporate Governance and Audit Committees. In Sherer, M. and Turley S. (Eds) Current Issues in Auditing. London: Paul Chapman Publishing, 1997, 70-84. McKillop, D., McCarthy, O., Ward, M., Briscoe, R. and Ferguson C. (2002) Women in the Irish Credit Union Movement: North and South. Cork: Oak Tree Press. PriceWaterHouseCoopers (2000), Audit Committee Effectiveness – What Works Best. Florida: The Institute of Internal Auditors Research Foundation. Quinn, A. P. (1999) Credit Unions in Ireland. Dublin: Oak Tree Press. Raiffeisen, F.W. (1970) The Credit Unions. Neuwied on the Rhine, Germany: The Raiffeisen Printing and Publishing Company. Reed, W. S. (2002) Audit Committees, Today more than ever need to be proactive rather than reactive. Association of Governing Boards of Colleges and Universities, Trusteeship. Spollen, A. (1997) Corporate fraud: the danger from within. Dublin: Oak Tree Press. Journals Branch, B. and Baker, C. (2002) Overcoming Credit Union Governance Problems – What does it take? IFM Review, 7(2), 1-37. Devlin, D. (2003) Accounting in Crisis: The Accountant’s Perspective. Irish Banking Review, Summer, 18-26. De Zoort, F. T. (1997) An investigation of audit committees’

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CREDIT UNION SUPERVISION

oversight responsibilities. ABACUS, 33(2), 208-227. O’Higgins, T. (2003) Higgs – Friend or Foe?: A Director’s Perspective. Irish Banking Review, Summer. 28-40. Spira, L.F. (1999) Independence in corporate governance: the audit committee role. Business Ethics: A European Review, 8(4), 262–273. Sweeney, P. (2002) Audit Committees: Bracing for Shakeup. Financial Executive, December, 18 (9), 16-18.

Supervisory Committee Manual. Dublin: Irish League of Credit Unions. World Council of Credit Unions (2000) Model Law for Credit Unions: Guidelines for legislation to protect the safety and soundness of credit unions, developed and recommended by World Council of Credit Unions, Inc. Madison: WOCCU. World Council of Credit Unions (2000). Guide to International Credit Union Legislation. Madison: WOCCU

Verschoor, C. C. (2002) Reflections on the Audit Committee’s Role. Internal Auditor. April, 59 (2), 26-35. Miscellaneous Credit Union Act 1966. Credit Union Act, 1997. Healy P. and Palepu K. (2002) Viewpoint: Audit the audit committees. London: FT.com Higgs, D. (2003) Review of the Effectiveness of NonExecutive Directors. London: Department of Trade and Industry. Irish Companies (Auditing and Accounting) Bill, 2003. Smith, R. (2003) Audit Committees: Combined Code Guidance. London: FRC.

The New Harmony Press, 2006

Co-operatives and Globalization. Adaptation or Resistance? Edited by Yair Levi A compilation of six thematic papers published in the Journal of Rural Co-operation With Forward, Introduction and Conclusions by the Yair Levi How can co-operatives integrate into the globalized system without loosing their identity? Fourteen leading writers and researchers on co-operatives contributing twelve papers are brought together from seven countries to offer their perspectives on this vital question. Enquiries for bulk purchases: [email protected] or individual orders from local bookstores

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

67

CO-OPERATIVE BUSINESS HISTORY

The Credit Problem in Rural Iraq: the Baathist stateowned agricultural banks financing of land reform co-operatives Al Rashid

Abstract The institutional rural credit problem in Iraq is complex and multi-dimensional, involving politics, society and culture. This article presents insight into the failure of successive military regimes and the Baathist state (represented by the state-owned Agricultural Bank) to provide adequate and viable loans to land reform co-operatives from 1958 to 1975. The credit problem in Iraq, as in many developing countries, centers on the continuous indebtedness of the farmers and the relatively high cost of obtaining credit. During the last three decades, successive Iraqi regimes have attempted, however unsuccessfully, to tackle the deficiency in Iraq’s rural credit system. The objective of the 1958 coup was to strengthen institutionalized credit in order to create a more competitive credit system. The Co-operative Bank and the Agricultural Bank were to help attain this goal. Six years after the Land Reform Law of 1958 was enacted, little had been achieved. A new credit policy was adopted after the Baath coup d’etat of 1963 which advocated the elimination of non-institutional sources of credit. It was felt that increasing the loans advanced by the Agricultural Bank to the co-operatives could do this. This policy was retained by the Baath regime with the added provision that the co-operatives were to replace non-institutional sources of credit and that institutionalized credit was to be considered an important means to increase agricultural productivity. While there was a significant increase in both the number and size of loans allocated by the Agricultural Bank to the co-operatives. The government sought to control the co-operatives to achieve political objectives and discouraged any financial viability that might challenge its authority. The article concludes with some policy suggestions to improve the future institutional credit market in rural Iraq.

Key words Agricultural Banking, Agricultural Credit, Agricultural Cooperatives, Iraq, Land Reform, Rural Development, State. 68

The nature of the rural credit problem in developing countries During the last four decades, several valuable studies and articles covering the literature on rural credit problems in developing countries were published. Specialized studies sponsored by international organizations such as the F.A.O. and I.M.F. have contributed significantly to understanding the dimensions of the rural credit problem in developing countries. In a developing economy the difficulties of obtaining capital of any sort are great, due to lowincome and considerable inequalities in income distribution. There are usually three main sources of finance; current income, past savings and loans. Due to the subsistence nature of the agricultural economy and the time lag between incurring the costs of production and the eventual returns on investment, credit is fundamental to the continued process of production. According to Balkenhol, “Without finance there can be no income generation or poverty alleviation. Without finance enterprises cannot be created or sustained. All businesses … whether they are large or small, engaged in manufacturing or trade, located in the countryside or in the city, owner-managed companies or public corporations… need access to regular and adequate financing for production, sales and distribution. Even informal income- generating activities need financial resources for working capital and investment purposes, as well as the know-how required to manage such resources” (Balkenhol, 1991, pp645-655). From the point of view of the cost of credit, agriculture in a developing economy suffers from certain disadvantages as compared with other sectors such as industry and trade. These include the small, fragmented nature of peasant operations, the risks and uncertainties involved in farming, capital scarcity and the high degree of competition between borrowers for capital, the slow rate of turnover of capital due to the long gestation period of agricultural production, and the monopoly position of many money-lenders and

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CO-OPERATIVE BUSINESS HISTORY

traders; all these impose conditions which make the cost of credit to agriculture higher than in many other types of economic activity (U.N.F.A.O., 1957, p12). Due to high risk and uncertainty, a money-lender would add a two to 200 percent premium to the normal rate of interest, depending on his anticipated rate of default. Since the proportion of defaults is high in the lessdeveloped countries, rates of interest would obviously be adjusted upward in order to make good the loss caused by defaults ( Wai, 58, pp107-113). Moreover, the cost of management of loans is higher in agriculture compared to other sectors. The number of loans advanced by the money-lenders in rural areas may be relatively small and the size of individual loans are generally small. (Bottomley, 63, p29) As a result of these factors, and also due to the inclusion of the monopolistic position of the money-lender, the latter charges a higher rate of interest (Bottomley, 63, p29). Other studies highlighted that the majority of stateowned agricultural banks had not been effective in their primary goal of improving access to credit in rural. (Al Hilali, 69, p235) “A reduction in the cost of borrowing has been achieved only for large borrowers, while small producers have been saddled with high transactions costs”, (Vega,A. and Graham, 95, p20). This demonstrates a tremendous discrepancy between the stated objectives of these institutional lending organizations to assist small farmers to obtain reasonably priced loans and the actual results. A number of studies over the past twenty years have confirmed these characteristics of rural financial markets. For example, Stiglitz concluded that adverse selection and moral hazard could prevent interest rates from achieving equilibrium between the supply and demand of credit (Stiglitz, 93, pp19-62). The role of politics in granting rural loans has been closely studied. For example, Cole stated the following about the public rural lending practice in India. “Over the 1985-1999 period, agricultural lending by public banks in India grew 5 to 10 percentage points faster in election years than in years after an election, that election year loans were more likely to be made to districts with more heavily contested elections, that these loans were less likely to be repaid, and that they did not measurably affect agricultural out put.” (Conning and Udry, 05, p13). The neo-liberal development literature emphasized micro credit programs as a promising method to

counter the defects of the rural financial markets in developing countries. However, a comprehensive study of 13 micro-credit programs in Asia, Africa and South America indicated that the benefits of the micro credit programs under study were not scale neutral as the upper and middle income poor tended to benefit more than poorest of the poor (Hulme and Mosley, 96). In general, the literature on rural credit distinguishes between “the traditional approach to rural finance” and a newer approach. The former is premised on extensive intervention in the rural markets to encourage farmers to adopt new technology, obtain favorable interest rate or to correct the bias towards urban dwellers. The latter aims to achieve the same objectives by promoting efficient rural financial markets through favorable policy environment, improving the legal and regulatory procedures that support rural finance markets, and addressing specific market failures in cost-effective ways through well designed, self-sustaining interventions (Yaron et al, 98, pp147-170). It is important to emphasize that despite its importance to the rural economy rural finance by itself is not a panacea for achieving advanced agriculture. The task of transforming traditional agriculture requires well-integrated economic and social plans. From 1958–2003, a strong interventionist –redistributive policy, guided Iraq’s policy makers. Some key aspects of this policy reflect central planning, encouraging an import-substitution and industrialization orientation, the introduction of land reforms and food subsidies. The dramatic increase in oil revenues during the period from 1958-1980 had significant political and social implications. These revenues were used by the state to create an authoritarian regime where citizens traded their political rights in exchange for economic benefits and the relative security of state jobs.

Indebtedness and the rural credit problem in Iraq Although no comprehensive information is available concerning the extent of indebtedness in rural Iraq, there are indications that the average Iraqi farmer has a very meager amount of capital at his disposal. During the last four decades the increasing problem of indebtedness, its causes and implications, has presented a grave challenge to successive regimes in Iraq. To the Iraqi farmer, borrowing is necessary not only to meet the costs of production but also to maintain his family. When, after the 1958 coup, the

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

69

CO-OPERATIVE BUSINESS HISTORY

government began to favor the formation of cooperatives, it was found that a considerable number of farmers were unable to meet the minimum shareholding costs of 1.250 Iraqi Dinar (I.D.) per annum. A study undertaken by the Institute of Co-operation and Agricultural Extension found that 8 to 12 percent of member farmers in co-operatives had debts exceeding 100 I.D. outstanding for over two years. Approximately 11 percent of the farmers were selling their cereal crops to merchants prior to harvest (“selling green”). About 50 percent of the farmers were indebted to merchants for the supply of credit on consumer goods, while 7 percent of the farmers were tied to the merchants by the provision of agricultural inputs, basically seeds and cultivation tools on credit. About 17 to 20 percent of the farmers were indebted to friends and relatives through the provision of loan funds to meet social and emergency expenditure (Russel, Sriram and Al-Abdulla, 71, p28). Under such conditions indebtedness tends to be identified with poverty and is not associated with increased productive investment leading to enhanced productivity and income earning capacity. Although the maximum rate of interest permissible under Iraqi civil law is restricted to 7 percent per annum, this has no effective force in rural Iraq and is vastly exceeded in practice. The cost of credit obtained from money-lenders in rural Iraq has certain distinctive peculiarities as it tends to be disguised and charged indirectly. Direct methods of charging interest are not very common in rural areas in deference to the emphatic pronouncements of Islam against usury. The Koran prohibits the creation of money, by money but allows money to be used for trading tangible assets that can generate a profit. Thus money- lenders adopted ingenious disguised usurious practices. One such common method is the advancement of money against an anticipated crop (called “selling green”) so that the deal appears to be a commercial rather than a purely monetary transaction. It is difficult to give a typical figure for interest rates levied in various parts of rural Iraq, since rates vary greatly from lender to lender and from region to region. The rates average 30% for one season, and can vary from 60 to 100% from one season to another (AlKhyat, 70, p115). Another study by Al-Hilali indicated that the average interest rates in rural Iraq could fluctuate between 10 to 30 percent per annum (Al-Hilali, 69, p235). The high cost of credit in most cases, is due to the lack of effective competition between the sources of credit. Apart from the semi-monopolistic position of the money-lenders that enabled them to exact more onerous credit terms, a considerable degree of risk is involved because of the conditions under which Iraqi 70

agriculture is practiced. For example, more than onethird of the total area under cultivation depends entirely on rainfall, which is highly erratic and seasonal. Moreover, the losses on crop yields caused by insects and pests may reach substantial proportions in some seasons, and according to one-study losses caused by pests to wheat and barley were valued at an average of 10,000,000 I.D. annually. Similarly, animal husbandry is characterized by inadequate forage and poorly developed veterinary services; these resulted in low levels of livestock production.

The agricultural credit policy and the supply of credit after 1958 One of the main objects of the Land Reform programme implemented after 1958 was to strengthen institutionalized credit as a step towards creating a more competitive credit system in rural Iraq. Theoretically it was to constitute an integral part of the land reform programme, which sought to facilitate the emergence and establishment of independent and productive family farms. Among the institutional agencies co-operatives were viewed as an important instrument for tackling the credit problem, as they tend to undermine the quasimonopolistic position hitherto enjoyed by the private money-lender. Furthermore, co-operatives have certain advantages over other agricultural credit institutions once a certain level of efficiency has been achieved. Operating on a local basis the board is familiar with the character and ability of its members and is, therefore, qualified to extend credit on the basis of a sound appraisal of each cultivator’s personal merits. Moreover, co-operatives can be organized so as to reach small farmers scattered throughout remote areas (Surridge, 62). Solving the problem of rural credit in Iraq necessitated the strengthening of the institutional agencies and improving their operational efficiency. The co-operative credit system required considerable assistance in order to develop a sufficiently competent autonomous organizational and financial structure to withstand and challenge the strong competition from private vested interests, and to meet the growing needs of agricultural development.

The supply of credit and the role of the Co-operative Bank in financing Land Reform Co-operatives The sources of credit in rural Iraq may be classified into two broad categories; institutional credit agencies represented mainly by the Agricultural Bank and the Co-operative Bank and non-institutional sources such

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CO-OPERATIVE BUSINESS HISTORY

as merchants, relatives, friends and money-lenders, such as village shop-keepers and other local traders. In 1956, the Ministry of Social Affairs made a recommendation emphasizing the co-operatives’ urgent need for financial and technical assistance. In 1959, following the introduction of the first agrarian reform, the Co-operative Bank was reorganized to encourage the co-operative movement and participate in any action designed to promote co-operative societies and accelerate their development and progress. In order to achieve this the Ministry of Agriculture and Agrarian Reform authorized the Cooperative Bank to undertake the following measures: 1. Provision of co-operative societies with various types of credit; 2. The purchase and import of any articles of equipment, or commodities that might be required by co-operatives; 3. To act as an agency for co-operatives in exporting their products; 4. To accept deposits from co-operatives and their members, as well as from non-co-operative organizations and individuals; 5. To assist co-operatives in foreign exchange matters; 6. To serve co-operative societies and their members through the provision of various banking facilities; 7. To provide co-operatives with storage facilities; 8. To participate in co-operative projects sponsored by co-operative societies and research the possibilities of expanding such projects. 9. To provide co-operatives with economic, technical, statistical and administrative assistance and advice (Al-Hilali, 1969).

Co-operative Bank capital and loans In 1956, the nominal capital of the Co-operative Bank was 250,000 I.D., which was increased to 3 million I.D. in 1959, with 51 percent of this capital to be advanced by the Ministry of Finance, and the rest to be contributed by the co-operative societies, which benefited from the credit services of the bank. The capital position of the bank indicated that both the Ministry of Finance’s subsidy and the co-operatives’ statutory subscription were insufficient to significantly boost the expansion of the embryonic co-operative movement. By the end of 1964/1965, the paid-up capital of the Co-operative Bank, represented only 22.15 percent of the bank’s nominal capital, amounted to 664,439 I.D. of which 600,000 I.D. originated from

the Ministry of Finance and the remainder from subscription by co-operatives. The Co-operative Bank law lacked detailed provisions specifying the nature, amount and duration of loans to be granted to the co-operatives. Most of the loans subsequently granted by the bank were short and medium-term, ranging from six months to four or five years. These two types of loan were usually required by, and extended to, agricultural and consumer cooperative societies, whereas long-term loans, with periods from six to twelve years, were allocated in particular to building co-operatives. The actual rates of interest charged by the bank varied according to the type of co-operative negotiating the loan. Three to four percent was charged on loans granted to co-operatives and four-and-a-half percent on loans extended to nonagricultural co-operative societies. Although this policy favored co-operatives in principle, by levying subsidized rates of interest (compared to the previously mentioned private sector rates believed to range between 30 percent and 100 percent per annum), the volume of credit released to agricultural co-operatives was minimal compared to that absorbed by non-agricultural co-operatives. For example, only six percent of the total credit outflow was destined for agricultural co-operatives, compared with 92 percent for building co-operatives during the period of 1959 to 1964 (Iraq, 74). It is difficult to measure the extent to which the credit needs of co-operative members were met by the Co-operative Bank due to the absence of reliable information about their credit requirements. Nevertheless, a study submitted by the Supreme Agricultural Committee indicated the minimal impact of institutionalized credit by revealing that, whereas in 1972 non-institutional sources provided the farmers in Baghdad province alone with an estimated 2 million I.D., the total institutional credit supplied annually in the whole of Iraq amounted to only 3,889,000 I.D. (Iraq, 1972, p81). This situation prevailed at a time when the beneficiaries from the land reform were in urgent need of credit, as former landlords ceased to supply loans and money-lenders were reluctant to advance funds in the uncertain political situation that followed the coup of 1958.

The Agricultural Co-operative Bank and its role in financing land reform cooperatives In 1945/46, an Agricultural Bank aiming to serve the agricultural sector was established with state funds and

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

71

CO-OPERATIVE BUSINESS HISTORY

with nominal capital of 500,000 I.D. An analysis of the growth of bank capital and its credit operation is important in assessing the performance of the agricultural banks in relation to their stated aim of tackling the credit problem in rural Iraq. Despite a steady growth in the bank’s assets, a continuous discrepancy existed between nominal and paid-up capital. This, coupled with increased demand by the farmers for credit following the first Agrarian Reform, seriously affected the bank’s lending position. Successive regimes between 1952 and 1974 repeatedly stressed the importance of adequately financing the Agricultural banks to promote higher productivity in practice non-agricultural banks received a greater allocation of funds from the government. For example, over the period 1952 to 1973 the average paid-up capital of the Agricultural Bank was approximately 5.3 million I.D. compared with 12.8 million I.D. of the Bank for Building and Construction. Even after the accession of the new regime in 1958 when the capital assets of the banks were publicly stated to have been raised to 10 million I.D., only 6, 243,897 I.D. were reported to have been allocated by 1965 (Iraq, 76).

The Agricultural Bank and credit operations The Agricultural Bank’s credit operations were severely criticized in the period immediately prior to 1958 coup on the grounds that large landowners having adequate securities at their disposal constituted its most important clients. Since the Agricultural Bank required collateral such as assets or personal property as prior conditions for a loan this consequently disqualified the majority of landless farmers from availing themselves of its credit services. Despite a progressive increase in the number and size of loans advanced annually by the Agricultural Bank, they represented a total of only 25,374,276 I.D. for the period 1938 to 1972 or an annual average of 746,302 I.D. This compared very unfavorably with non-institutionalized forms of credit, which provided an estimated annual 17 million I.D. in Iraq before 1958 (Iraq, 1976). Although successful implementation of land reform necessitates careful advanced planning and coordination between the various institutionalized agencies operating within the agricultural sector, no detailed instructions were issued to the Land Reform co-operatives in order to familiarize members with the size, type and duration of the loans available. The year 1964 was crucial in the evolution of the government’s credit policy as it represented a more committed orientation towards the co-operative movement. For 72

the first time a consistent set of regulations was introduced governing credit facilities accorded to Land Reform Co-operatives. The following are some of these important aspects: 1. A direct contact was established for the first time between the Agricultural Bank and the Directorate General of Agricultural Co-operatives, which aimed at achieving an annual credit plan. 2. Agricultural co-operatives were freed from the immovable property qualifications as a surety measure, the latter being replaced by an official guarantee from the Supreme Agricultural Committee, which is the highest authority in the agricultural sector responsible for planning the development of the agricultural sector. 3. A preferential interest rate of three percent was established on loans to agricultural co-operatives, this being significantly lower than the rates charged by non-institutional sources of credit. 4. Branch managers of the Agricultural Bank were authorized to grant loans with prior consultation with the Directorate General of Agricultural Cooperatives Headquarters in Baghdad to hasten the loan procedure. 5. Individual co-operatives were permitted to borrow in excess of 3,000 I.D. (Tabra, 76). As a result of the Agricultural Bank’s new policy of giving priority to agricultural co-operatives, the latter’s share of the total volume of loans issued increased from twenty four percent in 1964/65 to fifty nine percent in 1975 (Iraq, 75). No official explanation was provided for why 41 percent secured no loans especially since, at that time, all co-operatives members were experiencing an acute need.

Distribution of credit within the co-operative sector Although the total credits allocated to the cooperatives increased significantly over the period from 1964 to 1974, it is noteworthy that certain cooperatives continued to benefit from the Agricultural Bank loans whereas others continued to be excluded despite their meager internal resources. This uneven channeling of loans to some co-operatives to the exclusion of others may be explained by bureaucratic shortcomings of the Directorate General of Agriculture Co-operatives. For example, whereas the Agricultural Bank allocated 7,346,790 I.D. to the Directorate General in 1972 for redistribution to the co-operatives, only 2,202,359 I.D., or 36 percent of the sum allocated,

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CO-OPERATIVE BUSINESS HISTORY

was actually withdrawn and redistributed. By 1973-74, the proportion had risen to 42 percent (Iraq, 1976). Reliance on external rather than internal resources may have bene essential during the early stages in the establishment of co-operatives in developing countries, but for the emergence of a truly independent and selfsustaining co-operative movement this initial relationship must be accompanied by a reversal of this pattern, which, in the long-term, must be inimical to the application of the basic co-operative principles of self-help and local autonomy. A major factor, which aggravates the problem of utilizing co-operative resources, is the restrictive centralization in decisionmaking. Some Land Reform Co-operatives accumulated relatively large reserve funds but they were not allowed to utilize them productively. This passive attitude toward developing the internal finances of the co-operatives was the result of a the government policy that sought to control the cooperative movement and discourage any financial viability that might challenge its authority.

The government agricultural credit policy after the 1968 Baathist coup The official publications concerning the objectives of the credit policy lacked coherence. After a careful reading of these publications, however, the following points emerged as significant aspects of Government policy: 1. The necessity of combating the long-lasting problem of overdue loans by farmers in rural Iraq, which was considered a partial cause of their low productivity (as it limits their capability to invest); 2. The elimination of non-institutional sources of credit and their replacement by institutional credit to ensure more equitable interest rates; 3. Enhancing farmers’ productive ability through the important means of institutional credit (Iraq, 76.) During the mid 1970s, the government attempted to make institutional credit more available. The Agricultural Bank reaffirmed the favorable interest rate of three percent on loans to Land Reform cooperatives. Baker questioned the rationale of such a policy: “Why (couldn’t) peasants borrowing at exorbitant interest rates in the informal market (from money lenders) borrow at the equivalent rate from credit institutions? Low rates of interest give an impression to the borrowers that the future is amply provided for, and thus,

encourage consumption. On the other hand, a high rate of interest increases the reward for saving.” (Baker, 73.) In Iraq, the reduced interest rate of three percent was applicable to Land Reform Co-operative loans only, and was justified on the assumption that these subsidized loans were to be utilized for productive purposes by the farmers. In 1974, the Agricultural Bank advanced to the co-operatives loans totaling I.D. 3,851,230, the largest amount ever disbursed to cooperatives by the Bank. However the share received by each co-operative averaged only I.D.2, 805. This amount could hardly serve to neither increase cooperative members’ productivity nor contribute significantly to improving farmers’ incomes. According to the 1971 Census, the informal credit market (i.e., private lenders) provided I.D.7.8 million to farmers, while the Agricultural Bank provided only I.D. 3.1 million (Iraq, 1975).

Reasons for the high default rates on the Agricultural Bank loans Following the governments’ policy in 1964 of extending credit availability. There was a significant increase in both the number and size of Agricultural Bank loans allocated to the Land Reform co-operatives. There was also a considerable increase in defaults, from 1 percent in 1966 to 53 percent in 1975 ( Iraq, 1976). Some direct and indirect causes for these default rates during the 1970’s follow. The following are some of the problems that might have directly or indirectly caused a considerable increase in co-operative default rates during the 1970’s. Land reform regulations The stated objective of the Ministry of Agriculture was to facilitate the emergence of an efficient credit system in rural Iraq. In practice, the land reform regulations severely restricted the right to sell or mortgage the redistributed land. The Supreme Agricultural Committee acted as the grantor of loans advanced to co-operatives. This may have encouraged borrowers to believe that expropriation of their land, as penalty for default, was only a remote possibility. One moral hazard factor in aggravating default rates was the lack of security or collateral received from the debtor in exchange for the co-operative loan. Another factor was the fact that the Directorate General of Agricultural Co-operation did not formulate a credit policy to encourage cooperatives to build their own internal savings to serve as sources of loans to members. This led to a weaker

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

73

CO-OPERATIVE BUSINESS HISTORY

commitment to repay loans since the co-operatives lost nothing in the case of default. So persistent was this situation that loans were regularly written off.

The Agricultural Bank and its cooperative loans practices A critical function of any lending institution is monitoring the status of the enterprise, which has been funded. In this instance, the Agricultural Bank depended on the co-operative supervisors to report and follow up on information related to the Bank’s investments. In fact, co-operative supervisors coped with heavy workloads (some of them managing more than one co-operative), which relegated such reporting to a low priority. More critically, these supervisors reported up to a different authority, the Directorate General of Agricultural Co-operation within the Ministry of Agriculture, which reduced their incentive to follow through as requested. The Agricultural Bank was also to some extent culpable because of its loan recovery process. Loans were not collected as efficiently as possible due to a lack of experienced and qualified personnel. The Bank suffered from the absence of an extensive branch network to adequately monitor and supervise the loans to the co-operatives. In 1975 the Agricultural Bank operated 35 branches primarily concentrated in the main provinces, whereas the co-operatives were distributed among Iraq’s 318 administrative regions. High default rates by co-operatives drained the scarce resources of the Agricultural Bank and increased the social opportunity cost of institutional loans. The defaults affected the mutual trust between the cooperatives and the Agricultural Bank, undermining a key fundamental principal for a sound system of agricultural credit. Poverty and the default rate Rural poverty in Iraq contributed to the issue of loan repayment and defaults. Farmers who subsisted on meager incomes naturally devoted a large percentage of whatever additional sources came their way to funding basic needs. They did not have access to commercial bank loans (which were not available in rural areas for rural credit) nor could they afford the costly credit offered by traditional money lenders. The introduction of institutional loans offered by the government state-owned Bank, which did not require guarantees or collateral, created an environment in which farmers made basic and understandable decisions in support of their most immediate needs. (See Appendix 1) 74

The Fallow System and Default Rates The fallow system is widespread in Iraqi agriculture. This practice involves cultivation of half of the land while the remainder is left fallow until the next year. This practice is partially responsible for lowering crop production and, consequently, affecting rural income. The fallow system is widely accepted by farmers in rural areas, who believe it has these three advantages: the land’s fertility returns in a period of fallowness; it relieves demand on water supply, especially in the summer; and, it reduces the amount of salinity in the cultivated land. (Majid, 67, p41) Contrary to what the farmers believe, however, the fallow system is destructive and wasteful. Wild grass takes hold and then becomes part of the harvest, reducing the yield and its quality. Nor is there strong evidence to suggest a correlation between the fallow system and lower salinity. The continuation of this system is one of the factors, which decreases productivity, negatively affecting farmers’ incomes and, ultimately, their capability to repay loans. Socio-cultural factors affecting repayment of loans Farmers in rural Iraq do not make their economic decision in a social or cultural vacuum. They are profoundly influenced by the customs, norms, and modes of the society in which they live. There are few sociological and anthropological studies of Iraqi farmers’ investments habits. Of these, one study indicated that farmers prefer to allocate a relatively high percentage of their scarce resources to fulfill religious and social activities rather than to productive investments that can enhance their immediate income or future accumulation of capital. (Rashid & Ajam, 74) Such behaviour might further explain the high default rate on agricultural loans. More socio-economic research is required to analyze the impact of values and norms and their impact on capital accumulation and economic growth. The Oil Boom of the Seventies and the Default Rate Another factor that could have encouraged laxity in collecting overdue loans from the co-operatives in addition to the political objectives was the dramatic increase in oil revenues during the seventies. The oil revenues provided a surplus of 35 to 40 billion of foreign reserves. (Alnasrawi, 94) The availability of this surplus may have relaxed the financial discipline of the Agricultural Bank, lessoning enforcement of collection procedures, which in turn impacted the co-operative default rate.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CO-OPERATIVE BUSINESS HISTORY

The Baathist control of rural organizations Despite the fact that the rate of default on co-operative loans dramatically increased during the seventies, neither the Agricultural Bank nor the Directorate General of Agricultural Co-operation attempted to analyze the reasons. One reason might be attributed to the effective Baathist control of all rural organizations (including cooperatives) during the seventies. The goal was to increase the Baath party base and achieve more integration with its urbanized base. Although no figures exist for the number of co-operative members who were enrolled, Baath party membership increased significantly between 1968 and 1976 from between 100-200 in 1968 to 500,000 members in 1976. (Potter & Sick, 2004, p140) It is possible that members of the co-operatives who enrolled did not feel obligated to repay the co-operative loans on the assumption that they were entitled to compensation for following the Baath party political line. In addition, this understanding was enhanced when co-operative members were asked to provide political information on the opposition and, when during the eighties, they were asked to report on soldiers who deserted during the IraqIran war (Tareek Al-shaab, 2006).

Conclusion It has been noticed that the main beneficiaries of the Agricultural Bank loans during the last four decades were not the small farmers but, rather, rich farmers who were able to provide the collateral required for their loans. Thus, the institutional credit system failed in its basic objective of providing the co-operative small farmers with adequate credit to enhance their productivity. Thus though some of the literature on the one hand suggests poverty and need are key factors in the high levels of default on loan repayments this evidence suggests, given the high proportion of loans going to rich farmers, that corruption or political patronage may be a more significant factor. In Appendix 1 I reflect on the reality of poverty in Iraq and in Appendix 2 I suggest some of the actions that are clearly essential to ensure the mistakes of the past documented in this paper are not repeated. Whilst the state has much to answer for in terms of the failures it is also apparent that civil society or the lack of it must also be recognize as having been a significant factor in the weakness and failures of co-operatives in Iraq. Money without the human and social capital to make use of it will not resolve the fundamental challenges that co-operatives can help to address. Governments need to give more attention to investment in the human capital which must surely be a prerequisite to any offer of purely financial aid. It is also clear that real

auditable accountability for the money provided in terms of bills of sale in the context of field based inspections and real sanctions for the misappropriation of money must be put in place . A clear line needs to be drawn between money which is aid for managing and relieving the immediate needs of the rural or urban poor and money provided for the short to medium term development of the local economy. Co-operatives may use some of their surpluses for social and welfare purposes but they must never be permitted to utilize economic loans for such purposes and their leadership and management must be clear that they have a responsibility to all the members and the wider community to ensure that members use the funds for agricultural development for the purposes intended. It may well in the context of Iraq be appropriate for the Mosque to manage welfare funds for the poor but it can never be right for any religious institution in any context to siphon off funds intended for economic development. If local co-operatives are to manage development they must themselves be managed by professional people utilizing transparent management information systems in the interests of the whole membership in their community context. Governments need to give the development of such management their leadership capacity their priority rather than simply taking the easy route of giving money that provides politically expedient immediate amelioration but that fails to address the deep seated social and structural issues. In countries like Iraq unless the cultural issues are addressed as a part of the human and social capital development co-operatives will merely reflect the problems and cannot be realistically expected to transform them. Individuals with vision, values and skills can build communities. Government can help provide the infrastructure to enable such individual change agents to emerge but government cannot use a civil service or other institutional framework as a substitute for local leadership.

References Books Al- Khyat, K, (1970) The Agricultural Sector in Iraq , Basra University, Al-Ani Press, Basra. Alnasrawi, A, (1994) The Economy of Iraq, Oil, War, Destruction of Development and Prospects 1950-2010, Greenwood Press, Westport, C.T. USA. Bottomley. A, (1963) “ The Cost of Administering Private Loans in Under-developed Rural Areas”, Oxford Economic Papers, Oxford.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

75

CO-OPERATIVE BUSINESS HISTORY

Conning, J, and Udry, Christopher, (2005) “Rural Financial Markets in Developing Countries”, Handbook of Agricultural Economics, Vol.3. Hulme, D, and Mosley, P, (1996) Finance Against Poverty, Vol.1 Rutledge, London. Goetzmann, W, (1996) Financing Civilizations, Yale School of Management, USA. Iraq, (1975) Annual Abstracts of Statistics, Ministry of Planning, Baghdad. Potter, L. and G. Sick, (2004) Iran, Iraq, and the Legacies of War, Palgrave Macmillan. Russel.R, Siriram. K.and Abdullah. A, (1971) An Evaluation of Co-operative Development in The Agrarian Reform Areas of Iraq, Institute of Co-operation and Agricultural Extension, Baghdad. United Nations/ Food and Agricultural Organization, (1957) Credit Problems of Small Farmers in Asia and Far East, Rome. Journals Al-Janabi, A, (1967) “Study in Iraqi Soil and Its Importance for Expanding Agriculture”, Magazine of Agricultural Engineering, Baghdad, Volume 1, pp 20-24. Baker .C, “The Role of Credit in the Economic Development of Small Farmers”, A.I.D, Spring Review, 1973. Balkenhol, Bernd, (1991) “Savings, Credit and the Poor: What has the ILO to Do With the Financial Sector?:, The World Bank Research Observer, Vol. 9, No. 1, pp. 645-655. Miscellaneous Al-Hilali. A,(1969) “The Role of Institutional Credit System in Iraq”, Report submitted to the agronomists Conference, Baghdad. Al-Jasim, K, (1969) Agrarian Reform in Relation to Economic Development in Iraq, Ph.D. Dissertation, University of Oklahoma, U.S.A. Al-Talibani, M., (1969) Toward Real Agrarian Reform in Iraq, Baghdad, 1969 Hashim, J., (1970) Report, Evaluation of Iraq’s Economic Growth, Ministry of Planning, Baghdad. International Bank for Reconstruction and Development, (1959) The Economic Development of Iraq, The John Hopkins Press, Baltimore. Iraq, (1974) Report, Financing the Co-operatives in Iraq, Ministry of Agriculture and Agrarian Reform, Baghdad. Iraq, Report, (1972) The Agricultural Credit Plan in Iraq, The Supreme Agricultural Committee, Baghdad. Iraq, (1976), Report, “Distribution of credit within the cooperatives”, Directorate General of Agricultural Cooperation, Baghdad.

76

Majid, T,(1967) “The Policy of Irrigation and Drainage in Iraq, The Agrarian Reform Conference in Iraq, Baghdad. Rashid, N. and Ajam. M, (1974) “ Some Basic Aspects in Allocating Peasants’ Expenditure In Rural Iraq”, Paper delivered to the Second Conference held by the Organization of Scientific Research, Baghdad. Shaar, N, (2004) Report submitted to the Fourth Regional Workshop on Poverty Statistics, ESCWA, Social Economic Division, Amman. Stiglitz, J, (1993) “The Role of the State in Financial Markets”, Proceedings of the World Bank Annual Conference on Development Economics, Washington, D.C. Surridge, B, (1962) “Agricultural Credit, Co-operatives and Marketing”, Conference on the Application of Science and Technology for the benefit of Less-Developed Areas, United Nations. Tabra . K, (1976) Ministry of Agriculture and Agrarian Reform, Report, Linking The Co-operative Credit with Marketing, Baghdad. Tareek Al-shaab, (2006) “The Manipulation of the Agrarian Reform Laws”, (local newspaper), Baghdad. United Nations Report “Agricultural Credit, Co-operatives and Marketing”, Conference on the application of science and technology for the benefit of less- developed areas, 1962. Vega, A and Graham, D., (1995) “State owned Agricultural Development Banks: Lessons and opportunities for Micro finance”, Economics and Sociology Occasional Paper No. 2245, Ohio State University. Wai.T, (1958) “Interest Rates Outside the Organized Money Markets of Under-developed Countries”, International Monetary Fund, Staff Paper. Yaron, J, et al, (1998) “Promoting Efficient Rural Financial Intermediation”, The Research Observer, The World Bank

Appendix 1. A brief review of the sketchy literature on rural poverty in Iraq. The International Bank’s report published in 1959, uses a hypothetical example of a peasant in the irrigated zone, where barley is the principal crop, to serve as a rough indicator of a framer’s income. This farmer, who usually cultivates about 25 Donums (a donum is onequarter of a hectare), was provided with a share of the harvest calculated at three tons (from a gross output of 7.5 tons), which he could then take to market to sell at 10 I.D. a ton (1952 prices). If this share of the summer crop at 10 I.D.was added to the 30 I.D. incomes of his winter and summer crops, his annual income totaled 40 I.D. (International Bank, 59, pp132-133).

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CO-OPERATIVE BUSINESS HISTORY

From this meagre income, the farmer was often compelled to contribute sums for religious purposes as well as for guards and servants for the Sheik “landlord”. The few studies addressing farmers’ incomes after the Agrarian Reform law of 1958 provided differing conclusions. According to Al-Jasim, the land reform of 1958 did not improve peasants’ income, which totaled between 10 I.D and 20 I.D. from 1958-1964 (Al-Jasim, 69). Al-Talibani’s study estimated that peasants’ percapita income prior to the agrarian reform of 1958 was 20 I.D. from winter crops and 12 I.D. from summer products, totaling 32 I.D. per annum. After the agrarian reform, it was estimated that the income of peasants who owned 40 Donums of rich soil farmed by the traditional rotation system amounted to I.D. 80 from winter and 48 I.D. from summer products for 128 I.D. annual per-capita income (Al-Talibani, 69, pp72-73). Al-Talibani’s study, however, is not representative of results on all types of soil in Iraq, differing as they do in fertility, and divided broadly into three different categories (Al-Janabi, 67). A critical distinction should be noted between the standard of living of farmers as a whole and those who benefited from the agrarian reform law. The number of rural agrarian families who benefited from the law was estimated at 57,117 out of a total of 714,017 agrarian families by the end of 1958. Official statistics suggest an increase in the average share of rural family incomes from I.D. 134.3 in 1953 to I.D. 261 in 1969 (Hashim, 70, p69). These estimates are not accurate, however, because of the weakness of an arithmetic average as a representative statistical measure. The official statistics also did not provide a clear distinction between people working in the agricultural sector and those merely depending upon agriculture. More recent studies indicate that overall absolute poverty in urban areas increased from 25 percent in 1988 to 72 percent in 1993, while in rural areas, it increased from 33.8 percent to 72 percent between 1988 and 1993 (Shaar, 04). The F.A.O. indicated that in 2003, 55 percent of the population was poor and 44 percent were currently food insecure (F.A.O., 03). The widespread poverty that plagued Iraq during the last twenty-five years was the result of misguided government policies and priorities that did not recognize the importance of encouraging efficient allocation of resources to the productive sectors of the economy. Instead these resources were directed to the military, an unproductive sector. Finally, the country faced three devastating wars as well as sanctions that devastated its economy and ripped its social fabric.

Appendix 2. Potential Policies to Improve Future Rural Credit in Iraq While acknowledging the importance of market forces to stimulate economic growth, there is a great need in today’s Iraq to ensure a balanced mix of public and private participation to achieve economic growth. An agricultural development policy should increase farmers’ access to subsidized credit, infrastructure, extension services, improved inputs and technologies designed to assist small farmers to achieve high productivity and higher levels of income. The following are some suggestions to improve and remedy some of the failures of the credit market that plagued rural credit in Iraq during the last four decades. 1. The Ministry of Agriculture and the Agricultural Bank should consider setting clear rural credit policies for short, medium and long-range loans. Medium and long-range loans can be effective in encouraging crop diversification. Beyond that, special attention should focus on building infrastructure. No amount of accessible credit can induce a subsistence farmer to grow cash crops, for example, if there is no place to store the crops nor roads or transportation facilities to reach the market. 2. The Ministry of Agriculture should propose that the co-operative model be reinstated to help create cohesion out of disarray. Rural cooperatives are established in man developing countries for the purpose of achieving increased agricultural production, higher farm incomes and enhanced market competitiveness. However, in this new incarnation, the government should insure that the basic principals of co-operation are applied to create a reasonable environment for co-operatives to succeed. Co-operatives should not be reinstated simply for the sake of establishing co-operatives. Rural co-operatives are established in many developing countries for the purpose of achieving increased agricultural productivity, higher farm incomes and enhancing the competitiveness of the agricultural markets. The co-operative model can serve as a useful medium in which to supply subsidized credit to the small farmers in rural areas. Reliance on formal subsidized credit is essential at this stage. However, to maintain a truly independent cooperative in the long run, the co-operatives should develop their own internal resources to insure autonomy and financial viability.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

77

CO-OPERATIVE BUSINESS HISTORY

3. Democratically elected management in can contribute to the future success of newly formed co-operatives. They can identify and broker joint collateral packages to reduce default possibilities and ensure timely payment of loans. Co-operatives have a role to play in the development of civil society; they enforce democracy and contribute to the development of competitive markets. 4. The Agricultural Bank should be independent of the Ministry of Agriculture to avoid political manipulation.

11. The Agricultural Bank should consider adopting international best practices for regulatory, accounting and disclosure procedures. 12. The new co-operatives should not be used as government agencies and the Directorate of Agricultural Co-operation should encourage these co-operatives to function autonomously. Historical experience shows that co-operatives contribute best to their members and to their rural society when they are true to their principles.

5. Sufficient funds should be allocated to the Agricultural Bank since it is the primary source of institutional rural credit. Moreover, the Agricultural Bank should develop quantified objectives and practical processes to estimate the need for and nature of the credit to be disbursed across rural Iraq. 6. The Agricultural Bank should address the timely collection of its loans. It would need to implement efficient, ongoing loan supervision at the village level. In addition, this supervision should ensure full geographic scope covering all rural villages receiving loans. 7. The Agricultural Bank would need to work more closely with both extension services and the cooperatives’ management to educate farmers in the new realities, particularly that loans are not gifts from the government. The extension services should educate farmers that there is no link exists between securing a loan and supporting the politics of the government. The co-operative’s management should inform members that defaulting on loans jeopardizes their chances of receiving future loans. 8. The decision on loans granted to individual farmers should be made at the local village level, assisted by the local Board of Directors of the cooperatives, who are democratically elected. 9. The Agricultural Bank should consider formulating a package of incentives aimed at encouraging their loan administrators to stay in rural areas. Additionally, the Agricultural Bank could provide incentive plan for the timely repayment of loans. These could include interest rebates and access to larger loans. 10. The Agricultural Bank should implement management information systems that enhance the efficiency of controlling and supervising the loans.

78

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CO-OPERATIVE BANKING

Prudential Norms and Performance: research issues in co-operative banking in India K Ramesha

Abstract The co-operative banking sector in India following a history of government sponsorship and direction which characterizes the whole of the Indian cooperative movement post independence has found itself vulnerable and lacking managerial capacity to respond to the new regulatory and competitive environment effecting financial services following Indian government adjustment to the globalization of this sector. The problems have been mounting since the programme of liberalization commenced in 1991 and has become particularly apparent since the phased introduction commencing in 1996 of the new prudential norms covering capital adequacy, income recognition, asset classification and provisioning norms. There is an urgent need to research and map the relationship between the imposition of general financial sector regulation on the co-operative financial services sector and the particular difficulties the movement currently faces.

production, processing, distribution/marketing, housing, warehousing, irrigation, transport, textiles and even industries. Though the quantitative expansion has been commendable, in order to get a clearer view, it would be useful to consider the following. •

Historically, Governments and policy makers paid more attention to agricultural co-operatives and thus, the growth and development of the Indian co-operative movement is rather heavily tilted in favour of the agricultural co-operatives in general and, credit co-operatives in rural areas, in particular. In some areas such as dairy, urban banking and sugar, co-operatives did achieve success to an extent but there are larger areas where they have not been that successful.



The co-operative credit movement in modern India, seems to be a state initiated movement. The state partnership is, perhaps, the unique feature of the Indian co-operative movement. Today, the Government’s contribution to the share capital of primary agricultural co-operatives accounts for almost 7.5 percent of the total.



The state partnership which was conceived as a measure for strengthening the co-operative institutions had paved the way for ever-increasing state control over co-operatives, their increasing bureaucracy and politicization culminating in virtually depriving the co-operatives of their vitality as well as their democratic and autonomous character. This has been acknowledged as a critical co-operative problem since the 80’s or even earlier and one of the ICA conferences of that period was devoted to that issue alone. Unfortunately one may reference many countries/sectors where this problem is currently present.



Dormant membership, lack of active participation of members in the management, lack of professionalism (and absence of corporate governance), undue political and bureaucratic intervention, have made the majority of cooperatives at the primary level almost moribund. Inevitably, this has resulted in weakening the cooperative edifice. The upward transmission of the weaknesses of the primary societies has affected the capabilities of the higher level co-operative

Key words Co-operative Banking, Prudential Norms, Performance, Research, Regulation

Indian co-operative banking – a historical introduction The Indian co-operative movement, like its counterparts in other countries of the world has been essentially a child of distress. The state’s patronage to the movement continued even after 1947, the year in which India attained independence. The independent India accepted the concept of a centrally-planned economy and co-operative organizations were assigned an important role. The policy of the Government towards the co-operative movement was guided by the recommendations of the Saraiya Committee, which stated that “the co-operative society had an important role to play as the most suitable medium for the democratization of economic planning”. Since 1950s, co-operatives in India have made remarkable progress in various segments of the Indian economy. During the last century, the co-operative movement has entered several sectors such as credit and banking,

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

79

CO-OPERATIVE BANKING

federations in so far as their usefulness to the former is concerned.

Credit co-operatives in the post-reform period



With regard to the agricultural credit co-operative structure, although the quantitative expansion has been quite satisfactory, the movement continues to suffer from structural defects and operational deficiencies. The acknowledged operational deficiencies of the co-operative credit structure have been (I) weak recycling of credit, (ii) poor resource mobilization, (iii) ineffective lending and (iv) poor recovery.



The agricultural credit co-operative system in general has become rather over dependent on external support in terms of participation in share capital by Government and refinance from the Government owned Financial Institutions.

The process of economic and financial sector reforms was initiated in 1991, as a step towards a broader process of international economic integration and globalization of financial markets. The first phase of the current reform of the financial sector was initiated in 1992 based on the recommendations of the Committee on Financial System (RBI, 1991). The progress achieved in a substantial, yet non-disruptive, manner gave the confidence to launch what was described as the second generation or second phase of reforms, which focused especially on the banking sector. The report of the Committee on Banking Sector Reforms (RBI, 1998) provided a framework for the second phase of reforms in the banking system. The broad features of the on going banking reforms were; gradual deregulation of interest rates, tightening of prudential standards, increased competition and transparency, improvement of the quality of supervision, partial removal of selective credit controls, assistance to banks in debt recovery and reforms in money and foreign exchange markets. The general objective of the banking sector reforms was to improve the sectors efficiency by introducing an element of competition.

Co-operative banking in India today Credit co-operatives are the oldest and most numerous of all the types of co-operatives in India. These institutions may be broadly classified into urban credit co-operatives and rural credit co-operatives. There are about 2090 urban credit co-operatives, popularly known as Urban Co-operative Banks, which constitute the 10 percent of the aggregate banking business and therefore can be regarded as an important segment of the banking system. Rural credit co-operatives may be further divided into short-term credit co-operatives and long-term credit cooperatives. With regard to short-term credit cooperatives, at the grass-root level there are some 92,000 Primary Agricultural Credit Societies (PACS) dealing directly with the individual borrowers. At the central level (district level) District Central Cooperative Banks (DCCB) function as a link between primary societies and State Co-operative Apex Banks (SCB). It should be mentioned that DCCB and SCB are the federal co-operatives and thus the objective is to serve the member co-operatives. As against the three-tier structure of the short-term credit co-operatives, the structure of the long-term credit co-operatives has two tiers in many states with Primary Co-operative Agriculture and Rural Development Banks (PCARDB) at the primary level and State Co-operative Agriculture and Rural Development Bank at the state level. However, in some states there is a unitary structure with state level co-operative operating through their own branches and in other states an integrated federal level structure prevails. 80

The extension of the reforms, and particularly of those that were connected to the application of prudential standards to co-operative banking institutions, which were an important component of the banking system, was argues to be essential as any weaknesses in the co-operative segment could pose a systemic risk to the whole. Although co-operative banks operate at the district and state level, the urgency for and importance of extending the reforms toward them, need hardly be emphasized if one kept in view their reach and scale of operations. Therefore, the banking sector reforms could be treated as complete only if encompassing the co-operative segment, enabling it to function on sound lines at par with the other banking institutions. Accordingly, prudential standards covering capital adequacy, income recognition, and asset classification and provisioning norms were applied to co-operative banks in a phased manner commencing from 1996.

Co-operative banks in figures On March 31, 2003, the situation of the Indian cooperative banking sector was the following: 5 out of 30 State Co-operative Banks, (SCB) 102 out of 367 District Central Co-operative Banks, (DCCB) incurred losses which amounted. The gross NPAs of SCBs and DCCBs as a percentage of loans outstanding, on March 2002,

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CO-OPERATIVE BANKING

were 13.4 and 19.7 (RBI, Report on Trend and Progress 2003 / 2002. A quick inspection of 10 SCBs and 88 DCCBs by NABARD during 2003-04 revealed that some of the weaknesses that continued to affect the functioning of these banks were improper application/implementation of income recognition and asset classification norms, inadequate risk management strategies, deficient internal checks and controls and poor credit monitoring. Further, if one looked at rural co-operatives from a non-financial angle, then also this picture appears to be rather bleak. For instance, on March 2000, the elected management of 41 percent of the State Co-operative Banks, 37 percent of the State Co-operative Agricultural and Rural Development Banks, 21 percent of the District Central Co-operative Banks and 8 percent of the Primary Cooperative Agricultural and Rural Development Banks stood suspended. The Urban Co-operative Banking (UCBs) segment, which was considered as one of the robust and fast expanding segments of the banking system in early nineties, became one of the weakest with intermittent cases of failures/irregularities. A host of factors could be responsible for this, among which one might include increased competition, tightened prudential, supervision and regulatory standards, multiple control, etc. Although the Committee on the Financial System (1991) had indeed lauded the performance and progress of urban banking segment in the early nineties, today there are apprehensions as to whether these entities will be able to survive in an increasingly competitive environment. According to data of March 31, 2003, the number of UCBs classified as “weak” stood at 944 and 142 of these could not comply with the stipulated minimum capital requirements. The scheduled UCBS as a segment recorded negative net profit during the last three years. During 2003-04 alone, liquidation proceedings have been initiated in 23 UCBs, apart from re-scheduling two scheduled UCBs. Deposits grew by 3.3 percent (as against 10.6 percent for the previous year) during the first half of 2003-2004. Credit, in tandem, declined by 6.1 per cent in sharp contrast to an increase of 2.8 per cent of the previous year. The relatively low deposit growth also speaks of the falling confidence of the general public in cooperative banks, particularly in the UCBs due to the recent untoward incidents. However, nearly 45 per cent of the UCBs, which account for 55 per cent of the deposit base of the sector, are considered to be financially sound (RBI, Mid-term Review of Annual Policy, 2004). The above analysis, despite its limitations, shows that the credit co-operative movement has become weaker

during the post-reform period. It is also true at least to some extent that the co-operative banks have failed to take the cue from the initiatives of RBI in regard to prudential norms. Although co-operative banking organizations have survived, recent trends suggest that they are unable to deliver the expected results. In the present competitive environment, it is imperative that co-operative banks should be encouraged to initiate the process of operational restructuring to ensure their financial soundness in order to be able to withstand the competition, survive and grow. It is important to note that co-operative banks (and the movement) will be able to serve their larger responsibilities that are connected with societal dimensions only when they are financially strong.

Emerging research issues in cooperative banking Against this backdrop, it is argued that the following three aspects of critical importance need to be considered on a priority basis by the policy makers, regulator/s and co-operators to ensure the survival of co-operative banking in India. Needless to mention, these aspects of critical importance are highly interrelated and call for concerted efforts by all those concerned. The reform measures that were applied to the UCB sector may be classified into three broad categories. First, while recognizing the differences between commercial and urban co-operative banks, the majority of the prudential norms introduced for commercial banks are being extended to UCBs, albeit in a phased manner. Second, certain policy initiatives have been introduced (through Monetary & Credit Policies) to contain the systemic risk emanating from the co-operative sector, in particular from the UCB sector. Finally, the duality/multiplicity of control has been recognized as an irritant to their effective regulation and supervision. Although, the focal point of the reforms has been prudential norms, steps were also initiated to professionalize the management and the UCBs human resources in general. The author identified several broad areas for further research under three categories, i.e., prudential standards, professional management & governance and supervision & regulation. Prudential Standards In 1993, RBI introduced Income Recognition and Asset Classification Norms to UCBs. In 1995, the prudential exposure norms toward single/group borrowers applied also to them. Subsequently, in a phased time frame, the capital adequacy norms (capital to risk weighted asset ratio) was the third element that was

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

81

CO-OPERATIVE BANKING

added. While the promotion of prudent financial practices has become a sine qua non in the highly competitive globalized environment (in order to safeguard the financial health of the system, in particular of the UCB sector), it should not be forgotten that such standards were contrived essentially for commercial banks.

management committee of the urban co-operative credit societies/banks was also stipulated. While one cannot remain ignorant of the role of the Government in the promotion and development of co-operation in India, prescribing the number and qualification of the nominee directors may impair the co-operative character of the bank.

Although, the notion of a code of good practices is intuitively appealing, the temptation to prescribe universally valid model codes which, however, do not allow for differences in the institutional development, the legislative framework and more broadly, the different stages of development to be considered, should be avoided. In other words, while there is no dispute that UCBs should be subjected to prudential standards (capital adequacy, asset classification, income recognition and provisioning norms), it is not yet clear, whether the prudential standards prescribed for commercial banks would work without distorting the co-operative character of UCBs.

Fourthly, the strict entry norms in terms of minimum capital and membership requirements as it prevails in India, prevent the birth of new credit co-operatives and constrain the existing societies in so far as their expansion is concerned. Fifthly, the introduction of the same prudential standards blurred the difference between urban credit co-operatives/banks and commercial banks and possibly, the former may have to progressively imbibe the character of the latter, and possibly cause an identity crisis. There could be several such dimensions as discussed above. Therefore, it appears that the benefits of the prudential standards to urban credit co-operatives/banks came at a cost. The cost, needless to mention, is the dilution of the cooperative character (in terms of adherence to the principles). Hence, following the above discussion, four major issues (or broad areas for investigation by researchers/scholars interested in co-operative banking) are listed below.

For instance, capital is widely regarded as an index of the risk taking ability of a financial intermediary and therefore, a minimum capital requirement for an urban co-operative bank (to conduct banking business) may seem to be justified in order to ensure stability in the financial system. If one looks at a co-operative credit society/bank, with a typical co-operative created on the basis of self help and mutual help, then possibly its members (usually with limited means) may not be able to raise the required capital. If the capital base is to be strengthened, these banks will have to start dealing with non-members (or nominal members) on a large scale and perhaps may have to shift from “surplus” to “profit”. It is worth mentioning that in India, urban cooperative banks though on par with commercial banks with regard to prudential standards, are not permitted to boost their capital base through sub-ordinate debts. Further, there are ceilings on the value of the individual share holdings which have not been revised for quite a long period. Secondly, in order to ensure the credit co-operative societies’/ banks’ adherence to the prudential standards, the regulator’s frequency (and scope) of intervention should increase and, thereby, inevitably affect their co-operative character. In this regard, in India, the regulator’s intervention has indirectly infringed upon the functional autonomy covering areas like share-linkage, credit, investment, deposit etc. Thirdly, in the name of protecting the interests of the depositors (the majority of whom are not members of co-operative banks), the prudential standards were not only extended but even the professional content in the 82

a. How relevant are the prudential standards (i.e. norms of Basle Committee – accepted and implemented by most countries) to co-operative credit societies/banks? b. In countries where prudential standards have been extended to urban credit societies/banks, has the desired results been obtained? Can urban credit societies/banks adhere fully to prudential practices as defined? c. What are the implications of extended prudential standards to urban credit societies/banks cooperative character? d. Is it possible to derive a set of prudential norms especially for urban credit co-operative societies/banks from the Basle Standards? Professional Management and Governance Good corporate governance is critical to the efficient functioning of any entity and even more of a banking entity. Thus, the need for professional management and healthy governance practices in urban credit cooperative societies/banks in the present competitive environment is self evident. Hence, the management of a financial intermediary, co-operative or commercial bank, irrespectively of its size, requires highly competent human resources either paid staff or

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

CO-OPERATIVE BANKING

elected management. The framework for good governance and professional management in the cooperative sector should essentially emanate from the guiding principles and the given legal framework in different countries/states.

awareness and competencies are required for the board of directors for the effective management of a co-operative bank and how to ensure that within the framework of co-operative principles?

However, in India, co-operative banks’ directors/managers are frequently suspended and Government officials are posted or nominated onto the board. Unfortunately this trend has increased in the post reform period. Quite often the reason quoted is the lack of qualified and competent directors and the protection of depositors’ interests (the majority of whom are not members). While this is true, to some extent, the solution to this problem is certainly not the Government’s intervention as it seriously impairs the co-operative character. More than 200 urban cooperative banks were identified as weak/sick banks by the regulator at the end of March 2003.

Currently in India, urban credit co-operatives/banks are subjected to a dual control, which means that the administration related aspects are supervised and regulated by the State Government and the banking operations are supervised and regulated by the central bank of the country. This has, inevitably, resulted in overlapping jurisdiction of the state Government and the central bank of the country. Moreover, a clear-cut demarcation line of the financial and administrative areas for regulation is almost impossible to be drawn. Even if it were possible it would definitely act as an impediment to an effective supervision.

According to the co-operative philosophy/principles any individual member can get himself/herself elected to the management committee of a co-operative bank. It is this management committee which is entrusted with responsibilities such as risk management policy/strategy, credit and NPA management, investment management, marketing plan/strategy, asset-liability management etc. It should also be noted that the very concept of banking (financial intermediation) is undergoing critical changes in the contemporary competitive environment and the conventional management framework with which cooperative banks are comfortable may not be sufficient. Given this, it is doubtful whether the elected management (as per the existing provisions of cooperative legislation and stated principles) by individuals without sufficient knowledge/experience in financial markets or management can be at the helm of affairs of a co-operative bank?

Supervision and Regulation

While the central bank of the country has, under the Banking Regulation Act, the wherewithal to deal with crucial aspects of commercial banks functions, in the case of co-operative banks it requires the intervention of the Registrar of Co-operative Societies. Given the number of urban credit co-operatives/banks, the central bank of the country is not in a position to effectively supervise them. Thus, the duality of control not only affects the quality of supervision and regulations, but also the effective functioning of the urban co-operative banking sector. Needless to mention, under this regime of dual control, that urban co-operative banks may turn out to be neither co-operative nor commercial banks. Below are some areas of concern need to be researched. a. Which type and level of supervision and regulation is required for urban credit co-operatives? Is it possible to draw an outline of the supervisory framework?

There is an urgent need to ensure that in cooperative organizations, the system of governance including the size and composition of the board of directors (or elected management) is driven by the purpose and objectives of the business. In this regard, the following issues/areas may be of some interest to co-operative researchers.

b. Is the existing supervisor/regulator (central bank of the country) appropriate for regulating and supervising the activities of urban credit cooperatives/banks?

Is it possible to develop a framework of good governance for urban credit co-operatives/banks within the guiding principles of co-operation?

Conclusion

How can we ensure that the system of governance including the size and composition of the board of directors are in consonance with the purpose and objectives of a co-operative bank? What level of

c. Can we think of a separate agency (or even regulator) for urban credit co-operatives?

While the progress of the co-operative movement in India in general, and co-operative banking in particular, has been significant, the movement is clearly having difficulties in adjusting to the post reforms period. It seems the extension of reforms particularly in prudential standards to urban co-operative banking has

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

83

CO-OPERATIVE BANKING

provided substantial scope for external intervention which, in the process, has affected its co-operative character in terms of its adherence to the co-operative principles. More importantly, there are indications suggesting that the Indian credit co-operatives as a segment have become weak during the post-reforms period. It is also true, at least to some extent, that cooperative banks have failed to take the cue from the initiatives of the regulator in regard to prudential norms. Although co-operative banking organizations have survived, recent trends suggest that they are unable to deliver the expected results without substantial change in organizational culture and operating standards. In the present competitive environment, it is imperative for co-operative banks to be encouraged to initiate the process of operational restructuring in order to ensure their financial soundness so that they will be able not only to withstand the competition but also to survive and grow. With regard to the extension of reforms to the co-operative banking segment, it is not clear, yet, whether the same would ensure its soundness and stability. Although the promotion of prudent financial practices in urban co-operative banks has become a sine qua non in the modern competitive environment, one can not afford to ignore that such practices were contrived essentially for commercial banks. The particular role and purposes of co-operative banking particularly in their capacity to mobilize microfinance and provide an ownership base for the poorest strata of society at the heart of the economy should not be underestimated and indeed it is imperative that policy makers take full account of these issues. Further co-operative bank research is a priority. The most important araes are prudential standards, management & governance and supervision & regulation.

Ramesha K (2001a): Monetary and Credit Policy 20012002: Implications for Urban Co-operative Banking Sector, paper presented at Seminar on New Credit Policy of RBI and Co-operative Credit Management, July 19, 2001, Department of Economics, Shivaji University, Kolhapur, India. Reserve Bank of India (1989): Report of the Agricultural Credit Review Committee, RBI, Mumbai Reserve Bank of India (1991): Report of the Committee on the Financial System, RBI, Mumbai Reserve Bank of India (1999): Report of the High Power Committee on Urban Co-operative Banks, RBI, Mumbai Reserve Bank of India (2002): Report on Trend and Progress of Banking in India 2001-2002, RBI, Mumbai Reserve Bank of India: Mid-term Review of Annual Policy for the year 2004-05, October 26, 2004 Udeshi, K J (2004): Issues in Bank Regulation and Supervision, Seminar on Global Banking: Paradigm Shift, FICCI, September 16, 2004, Bangalore

References Book Ramesha K (1996): Self-Help Groups: Emerging Cooperatives, in Rajagopalan R edited Rediscovering Cooperation (Volume II), Institute of Rural Management Anand, India. Miscellaneous Government of India (1998): Report of the Committee on Banking Sector Reforms, RBI, Mumbai, India. Ramesha K (2001): Credit Risk Management in Agricultural Co-operative Banks, National Seminar on Co-operative Reforms, January 24-25, 2001, National Bank for Agriculture and Rural Development and Vaikunth Mehta National Institute of Co-operative Management, Pune, India.

84

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

EXECUTIVE OPINION

Time for a new addition to the consumer cooperative movement Edgar Parnell

Consumer co-operation

A new initiative

When the early co-operators of Rochdale set up their first co-operative shop in 1844, they were primarily motivated by a desire to get unadulterated food and to free themselves from exploitation by unscrupulous traders. Their solution was to provide their own retail service where quality and fairness could be assured. In the 21st Century in many parts of the world the consumer co-operative retail based business model has suffered setback and in some countries has ceased to exist at all. Whilst private sector retailing has grown to global operational levels few national consumer cooperatives have been able to go beyond the confines of their country of origin. Unscrupulous traders remain ready to exploit consumers, and these are not necessarily small businesses but very often large-scale national and multi-national concerns.

There is a clear need that is not being properly addressed for greater consumer justice concerning the quality of the products and services they receive across the full range of consumption. Such a co-operative focus would both raise consumer awareness of the standards that are available as well as help individuals seek redress for the failures and misleading presentation of goods and services. This is why the Consumer Justice Co-operative needs to be launched. It would not be an alternative to retail based cooperation nor a diversion to the Fair Trade and environmentalists lobby but rather an added framework to reinforce the overall struggle for justice in a variety of forms that unites the whole co-operative movement.

In a more positive vein there is a rising tide of consumer awareness concerning ethical consumption concerned with health, environmental and justice based issues in which the British Co-operative Bank has played a leading role in promoting. The British Food Retailing arm of our consumer co-operative movement has established benchmarks for consumer standards in both health and labelling. The Japanese consumer cooperative at Kobi sets the global standard in fresh food, quality assurance, health merchandising, supply chain management, energy conservation and consumer education in a cultural as well as specifically informational content. However, it is easy by a process of monopolistic practices, confusion marketing and advertising budgets that consumer co-operatives just cannot match for cooperative established benchmarks to be missed by the average consumer. Governance processes and other institutional issues are also making it hard for the best retail co-operatives to translate their local /regional competencies onto the global marketplace. In addition to these barriers facing traditional retail based cooperatives, consumers consume goods and services in most countries which in any case are just not provided for by their retail based consumer co-operatives.

In today’s world, only when people co-operate in large numbers, sufficient to counterbalance the power of big business can consumers expect to make any real difference to the way that many businesses treat their customers. Many people feel an overwhelming sense of powerlessness when in dispute with faceless companies, often global in scale, with their headquarters based in a different country. It is totally frustrating to be fobbed-off by junior personnel or unable to speak to a ‘real person’. Increasingly, companies are making use of automated response systems designed to deter complaints and recent systems screen-out calls from persistent complainants. Many companies are getting away with making the lives of their customers (victims) a misery, with impunity, and it is about time that the tables were turned on these offending businesses. Legislation appears to have almost reached the limits of its capacity to protect the consumer when dealing with the bad practices of many companies. Legal action is rarely an option for the individual due to the high costs and the inordinate length of time it takes. Even where there are established statutory or industry sponsored ‘watchdogs’, these often seem incapable of securing the necessary fundamental change to the offending companies. The government’s consumer service, while providing useful information, is inherently timid and toothless when addressing

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

85

EXECUTIVE OPINION

specific complaints. Our politicians seem to be either more interested in protecting big business or are ‘running scared’ when it comes to confronting major companies that are investing in facilities and providing jobs. All too often frustrated consumers with legitimate complaints about poor quality goods and services, simply ‘give-up’ in the face of a lack of response or avoidance tactics, so any complaint soon becomes a lost cause. Individual complainants can sometimes win minor victories, although, significant change in the behaviour of substandard businesses only happens when the combined power of dissatisfied consumers is brought to bear. Some groups of consumers have sought to address specific consumer issues, such as: bank and credit card charges, telephone scams (aided and abetted by telecom companies) and so on. However, such groups act in isolation and often have great difficulty in pressing their case. There are also several individuals and organisations that started out as genuine consumer action champions, but the difficulties facing small-scale campaign groups have resulted in ‘burn-out’ or acceptance of commercial financial support, which compromises their independence.

The Consumer Justice Co-operative The purpose of the Consumer Justice Co-operative (CJC) is to combine the power of those people who are: a) recipients of poor quality goods and services and/or b) victims of unacceptable practices of companies. CJC will highlight the causes of complaints and act as an advocate on behalf of its members; it will support and provide networking for existing consumer action groups and, where necessary, organise new groups to help them pursue their complaints against offending companies. CJC will be a completely independent organisation and will only seek recourse to the law when other efforts to secure necessary changes in company behaviour have been exhausted. CJC will provide the following services to its members: 1. Direct help for individual complainants to get redress for their grievances against businesses. 2. Support action groups where the same problems are affecting members and not being resolved, in bringing the necessary pressure to bear on the offending business so they respond positively. (Naming, shaming plus more radical measures when needed.) 3. Offer group legal costs insurance policy covering consumer disputes. 86

4. Provide vital information to members which aids their purchase decision-making and help prevent them becoming victims of scams etc. 5. Address wider issues of consumers’ rights, affecting members, on their behalf. 6. CJC will publish a web-based newsletter highlighting the complaints of members. It is anticipated that clusters of members with similar complaints will be organised into groups or networks and assisted by research and support from the CJC office. The outcomes from the various campaigns shall be reported back to members via the newsletter. Members will be recruited, both as individuals and as groups, from existing groups of dissatisfied consumers and from members of organisations with an interest in supporting the aims of CJC, for example: trade unions, women’s organisations and similar special interest groups.

Organisation of CJC CJC will be financed by annual subscriptions from members. Initially, voluntary group leaders will undertake much of the work, so at this stage the operating costs of CJC could be relatively small, but as the membership grows full-time professional staff will be required. Member share capital is also needed to finance the essential fixed assets, in particular IT systems and hardware. Donations and grants will be accepted, always provided these come without ‘strings attached’ that could jeopardise the independence of CJC. Supplying additional services, such as: in-depth research commissioned by specific groups pursuing specific actions against offending companies, may also raise income. It is anticipated that CJC will act as a trustee for an associated, but separate, educational charity that will provide training to consumers so as to improve their capacity to obtain value for money and secure justice from the suppliers of goods and services. A business plan is being developed and a prospectus will soon be made available to potential members. An intensive recruitment campaign is also planned, which will be launched via the World Wide Web and through the media. As soon as a number of high profile causes are championed by CJC it is anticipated that even more significant numbers of members will be recruited. Very soon a steering group will be selected to carry forward the initial development of CJC and the registration of this new co-operative. Anyone interested in getting more information about the CJC and or becoming involved can make contact via the website: www.consumerjustice.org.uk

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

EXECUTIVE OPINION

Risk and Reward: assessing stakeholder risk in a member based organization Roy Allen

Introduction The purpose of this paper is to commence a discussion on the merits of assessing and calculating the various elements of risk associated with traditional member based organizations and their total compliment of stakeholders: members, employees, suppliers, customers, investors or providers of capital and their geographic community. There are many forms of risk both economic and value-driven. Though this paper will introduce and discuss these and more, its primary goal is to begin a dialogue on whether and how generally accepted quantitative research principles, such as those practiced by actuaries in determining life insurance and annuity premiums or risk assessment strategies developed by energy based companies to deal with environmental concerns, can be laterally employed in member based organizations to first qualify and then quantify individual and co-operative risk among associated stakeholders. I will argue below that by understanding and employing such customized tools, a member based organization may become better prepared to structure and or restructure their entire stakeholder recruitment, development and retention programs and achieve a stronger defensive position against risk.

Key words Risk Assessment , Risk Management

Forms of risk Value-driven risks vary among stakeholders, indeed they may vary greatly among members of society as a whole. Societal risks and on a much more micro basis a specific community’s risk, may in fact be very different than an individual risks (Harden 1968). Speaking of grazing rights, Harden determined that while a pasture may be a common resource, it is not a common good. In fact, if every individual votes and /or exploits his or her personal rights and /or interests in or to the common resource (the pastureland), the affects on the community at large would be disastrous. The community must first qualify the primary baseline

criteria important to them. This may include but is not limited to the following factors. The pasture land (resources) available; the desires (needs) of the individual farmers; and qualitative (values) issues such as environmental stewardship, fair trade and sustainable succession or development issues; the community can then best exploit the deliverables (opportunity) defined via scientific quantification (risk/reward). Seeing the economic and social as a whole rather than opposites Assessing value-driven risk, whether in terms of social or economic value added and their respective methodologies required to sustain the organization or community itself, can never be successful by unilaterally surrendering to either the economic or social master. Value-driven risk is about a shared purpose that defines and expands both the economic and social dimensions. This is and must remain the essential differentiation in the co-operative context. Once the values are defined, documented and agreed to, the quantification methods should be clear and assessing risk becomes academic, (Sullivan 1982) using the following steps.

1. Find the data - mathematical, behavioral, historical and natural 2. Catalog and correlate the data 3. Evaluate and communicate the information There is simply no way a member based organization or any other can present a responsible case for measuring best practices or lost opportunities without following the same three steps. Purpose is prior to process for determining leading values What is the primary or collective purpose of the organization? Who does this purpose matter to? Who should it matter to? Who is or will be effected by its success? In what proportion will the various stakeholders be at risk in the event of such success or failure - socially and economically? What is the expectation of the stakeholders as to the longevity of

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

87

EXECUTIVE OPINION

the organization? For example, in a typical real estate investment club, the term of relationship among the member owners (social or economic) may be specifically set at 5-20 years. Co-operatives cannot correctly evaluate risk without clear statements of purpose (mission) related to their various stakeholders. Ownership is an important issue With a worker owned enterprise, the mission may be to provide sustainable employment for several generations. Using the same investment strategy or risk assessment model for different forms of ownership with contrasting missions would be unwise, chaotic and prove unsuccessful in one and possibly both cases. Beginning with the collection of data, a researcher would need to profile a specific subset of member based organizations for there are many - social, religious, educational, etc. And, once the profiling begins, it must continue in its collection of data for as long as the duration of the organization. The world does not stand still. It changes daily and the affects of those changes define the future information required to sustain the organization. Perhaps, for preliminary demonstration purposes, targeting both a consumer based membership and an employee owned enterprise would be helpful in defining common and also their contrasting goals and the requisite procedures for customization. A consumer co-operative aggregates the purchasing power of individuals and families to provide cheaper prices for goods and services and/or to obtain goods and services that would otherwise be unavailable. However, that is where the commonalities stop. Each consumer co-operative often adds their own personal touches through their value agenda - whether it be environmental, economic justice (fair trade), educational, or price. Their unique characteristics must define their risk assessment formulas. Organizationally, consumer cooperatives can either operate as a community enterprise or a buying group among particular individuals (Co-operative Development Services, 2006). However, their purpose is neither singular nor exact. The community dimension may add local competencies that represent competitive advantage and hence also represent areas of risk. But whatever the economic or social priorities its processes need to reflect social impacts thus it operates in a socially responsible manner focused on such matters as employee benefits or environmental advocacy as its primary purpose. What therefore, should its’ risk assessment and stakeholder investment strategies be? They must be qualified by 88

the defined mission of its membership. Each organization is unique. Risk assessment criteria is no different. In a retail co-operative, the purpose may be for all buyers of groceries in a specific area to combine their purchasing power and buy their desired items (organic, locally grown, wheat-free, vegetarian, etc.) in bulk with opportunities for quality and savings. At the end of the year, after all expenses are paid the customers who become member owners get to participate in any surplus revenue that is leftover in the form of distributions. Another form of consumer co-operative, with different goals, is the credit union which was originally developed in the nineteenth century. These associations have two primary purposes. Firstly, the mobilisation of small savings and secondly, the provision of access to small loans and capital sums to individual members for their greater benefit and welfare and that of their community. Sometimes competition evolves between factionalized credit unions demographics so that they forget that they are really consumer co-operatives (what’s best for the membership) and that institutional interests should not drive policy. Within the co-operative credit union their can also appear to be tensions between the depositor-member-owner, or the creditor-memberowner (I refer to their relative balance of interests, as in fact creditor-members have to be savers in credit unions). Here there is an economic risk that is absolutely quantifiable. But the success of low default rates that characterise the best managed credit unions may well be due to the individual creditors perceived social risks in their cultural or social context. Though both retail, and other procurement co-operatives and credit unions are based on the consumer co-operative model, their missions may incorporate a variety goals depending on the socio technical and cultural circumstances. When the mission itself is directed into more than one purpose, the methodologies practiced to define, develop and sustain that missions risks must follow suit. Finally, we consider the worker-owned co-operative or employee owned enterprise. A worker co-operative is defined as follows: “The main purpose of a worker co-operative is to provide employment for its members. Each member pays a membership fee or purchases a membership share, and has one vote regardless of how much money they have invested in the co-op. The co-ops’ assets are collectively owned and surplus earnings are allocated to the workers according to policies established by the co-op,

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

EXECUTIVE OPINION

often in proportion to hours worked by members and with limited return on shares” (Ontario Worker Co-operative Federation, 2006). Such a definition of purpose has clarity and simplicity for the purpose of risk assessment but other forms of employee ownership may present a more complex picture. A different form of worker owned organization is the ESOP or Employee Stock Ownership Plan that is used primarily in the United States. According to the National Centre for Employee Ownership (NCEO), the purpose is quite different. An employee stock ownership plan (ESOP) is a type of taxqualified employee benefit plan in which most or all of the assets are invested in stock of the employer. Like profit sharing, which is governed by many of the same laws, an ESOP generally must include at least all fulltime employees meeting certain age and service requirements. Employees do not actually buy shares in an ESOP. Instead, the company contributes its own shares to the plan, contributes cash to buy its own stock (often from an existing owner), or, most commonly, has the plan borrow money to buy stock, with the company repaying the loan (National Centre for Employee Ownership, 2002). The result of the above purpose is that the employees, since they do not actually pay for the shares are not accountable for the investment. It is the corporation that actually borrows the money and holds responsibility for the risk. If there are other financial shareholders, their economic investment too is at risk but, the risk may be different determined by the purpose of the investment - social or economic. However, the employees also have a risk, that being one of lost opportunity in the event that their rewarded shares for time spent on the job do not rise in value. It is easy to conclude that each organization needs an assessment tool that not only quantifies the risk, but qualifies it. A general definition of risk According to a George Washington University report on Dam Safety, Risk = probability x consequence or in a more elaborate expression we define risk as follows: Risk = threat 3 x vulnerability x {direct (short-term) consequences + indirect (broad) consequences}. (George Washington University, 2006) Their assessment is a simple one. What are the benefits? What is the threat of failure? What is acceptable risk? What is not? What are the short term and long term opportunities, consequences and the vulnerability of the plan compared to other public

policy. Then, they incorporate the science of risk assessment into the framework of stated public aspirations in an attempt to balance and/or improve stakeholder options. It is sometimes like the pastureland conversation discussed earlier in this paper. Does the public good created by conserving or exploiting the common resource outweigh the individual sacrifice? What are the needs of the community, the available resources to service the needs, the probability of certain events, the risks associated with both action and inaction, and the opportunity for stakeholder success? Often, the winner in a public works project is focused on economic gain, not the potential social cost. The medical field looks at things a little differently. According to an article published by the American Academy of Ophthalmology (Karmel, 2003) and quoting Paul L. Kaufman, MD. “The computer may spit out a risk analysis, a percentage risk, but you still have to make a decision with the patient………There’s always the art of medicine,where you have to individualize and say, ‘I know what the formula says, and this patient is outside the box.’ You still have the art, but you want the art to be overlaid on a solid scientific basis……. This is the way medicine should be practiced.” Perhaps his endorsement of scientific quantitative risk analysis, as well as its qualitative application can be adopted by member based organizations as well. Real or perceived risk cannot be managed without a defined purpose and assessment cannot be accomplished without proven scientific methods - data collection, statistical proofing and the utility of mathematical modelling. However, once the data is collected, the ultimate decision making process must fully take into account the stated organizational purpose. So too must the various stakeholder positions regarding equal, or the much more hotly contested issue to quantify - equitable distribution. An interesting case for further study might include an agricultural co-operative. A typical stated purpose looks like this: “We will seek to maximize net returns at the farm by preserving and enhancing milk markets and milkmarketing relationships, and by providing services and programs that create real economic value (aaowebsite, Dairylea 2006). However, ask three different farm members what their measurement of success is and you will likely get three different answers. Can the cooperative strategy fail to take account of specific risks faced by individual members? How are market preservation goals affected by existing strategies for economic gain? If a regional

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

89

EXECUTIVE OPINION

economy, by measurement of its gross domestic product, determines that a billion dollars can be made or lost over a ten year period if the market remains at status quo, what is the present investment required to keep the co-operative vital? The how is not as important as is the what and the why? For example, it is generally accepted business knowledge that if you are a $100,000 firm and want to become a $1,000,000 firm, you cannot use the expense calculations of the former, but must adopt those of the latter. If the industry requires a three percent expenditure for marketing, the managers of the firm cannot budget $3,000 (3% of 100,000), but must discover a way to deliver $30,000 (3% of 1,000,000) to the budget prior to the revenue ramping up - or, they will never reach their objective. The same budgeting adjustments will apply to training and production technologies. How might this be achieved without risking the existing business? Sharing risks One way would be to contact suppliers who may benefit from the growth and negotiate a revenue sharing agreement on all income growth over the present level of $100,000. This will not cut into the suppliers present profitability, but may secure future business revenues. Another strategy may be to prepare a tangible and intangible asset analysis to determine whether the firm might have a tradable resource (time or proprietary process) that can help them fund a larger marketing campaign. They know why they need a bigger budget - they want to grow. They know what they need - 3% of the targeted revenue. Now, they simply have to discover how to gather the resources and assess the associated risks - real or implied. Why + What + How - Risk = Opportunity. Complex missions responding to a complex marketplace Subsequent break-even and profitability analysis will ultimately be determined by the margins of the individual participants. However, in our world of valueadded market opportunities (organic milk, premium ice cream, fair trade coffee, range fed chickens, green technologies, life time employment, etc.), the why is front and centre - consumers respond to more than price. Service, quality, experience, and community also can contribute to a better life - for the company and the consumer. Therefore, leaders must be prepared to deliver sustainable multiple outcomes or surrender the playing field to others who can. In traditional business accounting, the balance sheet and/or profit and loss statement are used to provide managers with a clear assessment of return on invested resources - (time, money, labour, equipment, etc.). 90

However, the balance sheet will not reflect nonfinancial risks such as climatic, political or social activities. Yet, these calamities or opportunities, depending on the event and twist of fate, can often effect a project more dramatically than good or bad fiscal strategy. How does the gas and oil business prepare for these non business events? To begin with, it must assess as best as possible, the prevalent risks that can affect its survival which may typically be thought of as “beyond control”. Then, it must educate managers, shareholders, investment analysts and workers how to better understand these risks and challenge them to develop assessment and strategic solutions for dealing with them. Hybrid insurance products reduce the risk of sudden changes in climate - such as typhoons, earthquakes and flooding. Social calamities can be planned for by investing in education so that all affected stakeholders understand the complexities of demand, process and expected outcomes of a particular project. Finally, events caused by anomalies such as political ideologies can be planned for using diversification strategies and/or funding research on alternative energy (back-up plan technologies). What might happen to energy industry stocks if the general public simply woke up one day and decided to “vote with their wallets” to force a peace initiative in the Middle East? Might this happen? Probably not, but the environmental risk, those being caused by man or nature, must be acknowledged and assessed when developing a comprehensive sustainability model (Walker 2005).The best accepted environmental risk assessment tool in the oil and gas industry may be precaution (McLaren 2000). That too, however, may not necessarily be as useful in developing a sustainable nation state at the macro-level or local community member based organizations at the micro-level.

Conclusion Only by funding, defining and acting upon their own qualitative research, can value-based organizations develop quantitative risk assessment tools which integrate commercial and sustainable social success (Business Social Responsibility, 2005). Calculus and probability theory are key components of assessing risks and assessing risk is the foundation of actuary science. However, risk can be both present and pending. What is relevant now is not necessarily more so than that which might occur tomorrow. It is a matter of researching the known, calculating cause and effect of deliberate action or inaction, engaging critical thinking, discussion of probable future events and

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

EXECUTIVE OPINION

drawing knowledge based conclusions to determine the mathematical possibility of any or all of them occurring during the same business cycle. Member based organizations deal with the same complexities as any other participant in a global economy - fiscal, environmental, stakeholder rights, regulation and sustainability. They must therefore become as diligent and vigilant in exploiting the professional sciences adopted by their competitors. Ensuring a clear understanding of the risks associated with the whole socio-economic mission of co-operative enterprise as a business risk is to recognise not a duality confusing and distracting management, but a potential quality and brand advantage of enormous significance for the shape of the market economy and civil society. Cooperative risk assessment by the same token needs to recognise that risks to open markets, the erosion of civil society and break down of community represent serious risks to the continuation of the co-operative business model.

Walker, Angus. (2005). APEC - APGAS Perth Forum. Ernst & Young - Sept. 2005. Website: http://www.apgas.com/au/pdfs/2005/walker_panel (approved).pdf

References Books Business for Social Responsibility (2006) Businesses for Social Responsibility. BRS. Website: http://www. bsr.org Co-operative Development Services, Ltd. (2006) Glossary, CDS. Journals Hardin, G. (1968) The Tragedy of the Commons, Science, 162(3859) pp1243–8. Karmel,Mariam. (2003). Glaucoma Risk Model: Piecing It Together. Eye Net, American Academy of Ophthalmology. Miscellaneous aaoWebsite: http://www.aao.org/aao/news/eyenet/feature1/feature1_nov _2003.htm co-op development Website http://www.coopdevelopment.org.au for Website: http://www.foe.co.uk/resource/presentations/riskybusiness.html National Centre for Employee Ownership, (2002) How to Select an Employee Stock Plan for Your Company, NCEO. Website: http://www.nceo.org/library/how_to_choose.html Ontario Worker Co-op Federation Website: http://www.ontarioworker.coop/what_is_a_worker_coop.htm Sullivan, Gerald J. (1982) Keynote Speech to the Casualty and Actuarial Society. Website: http://www.casact.org/pubs/proceed/proceed82/

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

91

DEVELOPMENT CASE STUDY

The Credit Co-operative Movement in Myanmar: an application of the “thrift and credit co-operative evaluation methodology”. Gus Poston

Abstract There are approx 400,000 members of thrift and credit co-operatives in Myanmar. Most members are public servants, but the movement is becoming increasingly strong among traders and entrepreneurs. This case study describes the movement and indicates priorities for development. There is likely to be rapid growth in the financial services sector in Myanmar once macro-economic conditions become more favourable. The thrift and credit co-operative movement is the only provider of financial services for many people and is well placed to lead this growth, so long as it develops its capabilities now. The priorities are to (i) develop the national and regional support structures so they are more responsive to societies’ needs, (ii) change the culture of the leadership of the societies, focusing on independent growth and member needs, and (iii) expand societies’ products and membership so they achieve scale.

Key words Credit Co-operatives, Culture Change, Development, Evaluation Methodology, Institutional Support, Leadership, Membership, Myanmar, Strategy.

Approach This study of the credit co-operative movement of Myanmar followes the ‘Thrift and Credit Co-operative Evaluation Methodology’. This methodology, described in outline in Fig 1, can be found at www.NewThinking.org.uk/toolkit.htm, along with templates and evaluation forms. The methodology creates a baseline description of a co-operative movement, identifies strategic priorities and compares the performance of a co-operative movement with peers. The rest of this case study follows the framework of the methodology. During the investigation the author visited a number of co-operatives, as well as Central Co-operative Services (CCS) and the Department of Co-operatives. The 92

author thanks CCS for assistance in these visits. The Methodology described in Fig 1 below at section A provides a framework for the descriptive sections of the Thrift and Credit Co-operative Movement and of its various segments.

Base description of the co-operative movement in Myanmar Co-operative societies have a long history in Myanmar. The first co-operative societies were founded in 1904 to provide savings and credit services, similar to the model applied in other South Asian British colonies. Under the Co-operative Law of 1970, co-operatives were closely controlled and monitored by the national government, along socialist principles. With the change to an open-market economic system, a new law was passed in 1992 – one of the most liberal cooperative laws. Since then, the government has been reducing its influence in the day to day operations of co-operatives. There is a national support structure, led by the Ministry of Co-operatives. The co-operative movement has four levels. Each level conducts commercial activities, which may include trading, service provision inter-lending, etc. Each level primarily offers services to its owners, but may also work with other parts of the movement (e.g. the Tertiary Credit Union serves the Secondary level Syndicates, but also Primary Societies). There are 17,092 primary societies based in villages, towns, factories and government institutions. Their membership ranges form 15 to 3000 in agricultural cooperatives, industrial co-operatives, general trading cooperatives, education employee co-operatives, and credit co-operatives. The co-operative movement has founded a commercial bank – the Co-operative Bank, founded under the commercial banking legislation. It is the result of the merger between the previous Cooperative Bank, Co-operative Promoter’s Bank and Cooperative Farmer’s Bank. It currently has 15 branches (5 in Yangon Division, 5 in Mandalay Division, 3 in Pego

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

DEVELOPMENT CASE STUDY

Division, one in Shan State). The Co-operative Bank is owned by the co-operative societies and private shareholders. It offers normal commercial saving and loan products, lending with collateral, both to the cooperative movement and other customers. It is said to focus on larger, commercial operations.

The Central Co-operative Society (CCS) is the Apex level body of the co-operative movement. CCS is based in Yangon and recently moved to offices separate to the Ministry of Co-operatives, although it still works in partnership with the Department of Cooperatives and with the approval of the Ministry of

Fig 1: ‘Thrift and credit co-operative evaluation methodology’

Fig 2: Structure of co-operative movement in Myanmar International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

93

DEVELOPMENT CASE STUDY

Co-operatives. It is responsible for mobilising and supporting the whole co-operative movement and is currently expanding its activities. CCS has had a new organisation structure since mid 2006, with departments responsible for Research and Planning (research into activities of co-operatives and planning CCS’s future activities), Business Development (export promotion), Education and Training (initially focusing on CCS staff), International Relations (relationship with ICA Asia Pacific Office and ASEAN associations), Budget and Admin. Additionally, the CCS plans to develop a micro-finance capability – potentially in a separate department. The Department of Co-operatives is responsible for regulation, training, organisation, supervision, planning, inspection and liquidation of co-operatives. The head-offices of the department are in Naypyidaw, the new capital of Myanmar. There are Divisional Offices in the major towns and Township Co-operative Development Officers in each township who work with individual co-operatives. The Co-operative Export and Import Enterprise, reporting to the Ministry of Co-operatives, provides market information and expertise in exporting, and helps co-operatives form joint ventures with foreign companies. The Enterprise acts as a trader – earning revenue from exports and importing inputs required by co-operatives that are then sold to co-operatives. The Cottage Industries Department promotes handicraft manufacture in rural areas with training, marketing and micro-credit. There are a number of cooperative training institutions: the Co-operative Degree College, the Co-operative College, four Cooperative Regional Colleges, four State/Division Cooperative Training Schools and three Commercial Training Schools.

Base description of savings and credit co-operatives In March 2007, there were 1839 primary credit cooperatives, with approximately 374,000 members and 7,820 million Kyat total outstanding savings and shares. The number of co-operatives and members is falling, by 3.1% and 3.5% over the past year respectively, as defunct co-operatives are closed down. Over the same period shares increased by 15%, savings by 20% and loans by 30% (compared to inflation of approximately 30%). There are two* main types of savings and credit co-operative: department credit co-operatives and bazaar credit co-operatives. 94

Departmental credit co-operatives There are 1604 ‘department credit co-operatives’ (87% of the total), with 340,000 members (91% of the total). Societies typically range in size from 50 to 500 members, although there are some department cooperatives with 3000 members. The average number of members is 215. They were typically set up in the 1970s for government employees. Department co-operatives are typically in urban areas, based in a government department, factory, school, etc, although there are also societies in more remote areas which typically serve a number of different offices. Members are normally made up of the ‘middle officials’ of the institution, such as teachers, nurses or workers employed in government owned companies. On average, the shares and savings of members in the department co-operatives is low, only 15,500 Kyat per person. The societies often lend out more than their total paid-up shares plus savings, the difference being made up in un-disbursed profits. The average lending per person is 26,100 Kyat. As a result, department co-operatives only represent 67% of the total shares + savings and 44% of the loans of the overall movement. Membership in the department co-operatives is falling. The number of societies fell 4.3% during 2006 and membership fell 6%. This is due to a combination of the number of public servants reducing and inactive co-operatives closing. However, the activity of the remaining members increased considerably. Shares plus savings per member increased 31% and loans per member increased 71% over the same period, albeit from a low base. Overall, department co-operatives still have many members, but their activity is low. Most operate as simple rotating credit clubs. Few societies have ‘professionalised’. Systems, products and processes are very simple. Although savings and loan volumes are increasing, there is clearly considerable potential for growth.

Example 1: No. 3 State High-School Cooperative Society – a Departmental Credit Co-operative Society background Members are teachers and other staff at 5 high schools, 1 middle School and 12 primary Schools – total 420 members. The society started in 1974 so has more than 30 years’ experience.

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

DEVELOPMENT CASE STUDY

Shares and savings

Membership characteristics

Members buy shares of 6,000 kyat each, so there is a total 2.5m Kyat in shares. The society has total savings of 14.55m Kyat, i.e. 34.5k Kyat per person average. Savings are paid 1% per month (12.7% pa). The society keeps excess savings in the State Bank – but only 300k Kyat (2% of assets).

All teachers at these schools are members: membership used to be obligatory but is not any more. Members would not use other banks, as they do not understand them. They say ‘we are teachers, not economists’.

Loans

Bazaar credit unions

Members can get loans of 20 months – paid back monthly. Loans are limited to 140k Kyat for High School teachers, 120k Kyat for middle school teachers and 100k Kyat for Primary School. Loans pay 1% per month interest – i.e. there is no net interest income.

There are 180 bazaar credit co-operatives with 17,600 members. Most started about 10 years ago. In addition, there are 56 ‘other’ co-operatives with 17,200 members which have similar operations – most of these ‘other’ co-operatives serve traders not working in formal ‘bazaars’ and the two categories have been taken together in this analysis. In total, this represents only 13% of societies and 9% of members. On average bazaar co-operatives have 140 members, but some have 500 members.

Operations Savings and loan re-payments are made during general meetings and registered in the manual ledger – which is kept at one of the high-schools. Meetings are always held in one of the high-school class-rooms. Leadership and support There are 5 members on the board, all voluntary. The president is one of the high-school head-masters, the rest are teachers. All members meet once per month to decide who get the loans – members alone decide, there is no external influence. The Department of Cooperatives Local Co-operative Township Officer checks accounts once per quarter and audits annually – but provides no other support.

Membership is normally restricted to traders in a particular bazaar (a market – typically a building with a large number of market stalls), but some societies have started to offer services to other local businesses outside the bazaar and some allow non-members to have accounts. Members are more actively engaged in bazaar co-operatives than in department co-operatives. the average loans per member is 398,000 Kyat, so bazaar co-operatives represent 56% of the loans of the movement. Religious institutions are said to often leave

2006-2007

Bazaar Co-ops

Other Co-ops

Department Co-ops

Total

Societies

180

56

1603

1839

Members

17,674

17,291

339,794

374,759

Shares (Kyat M)

304

322

547

1173

Savings (Kyat M)

1101

824

4722

6647

Loans (Kyat M)

9565

1755

8891

20211

Average member per soc

98

309

212

204

Average savings per member

79,495

66,277

15,506

20,867

Average loan per member

541,190

101,498

26,166

53,931

Table 1: Basic financial performance of thrift and credit co-operatives in Myanmar International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

95

DEVELOPMENT CASE STUDY

large deposits with the societies. Lending is normally provided for business expansion, although some offer consumer loans, education loans, etc. Some bazaar societies already have products specially designed for poor traders – providing 50,000 Kyat ‘micro-loans’. The number of bazaar co-operative members and societies is increasing slowly, by 3.4% and 4.7% respectively. Although bazaar co-operatives are smaller than department co-operatives, they have attracted higher savings and loans per customer. However, customer activity is not growing fast, the average shares plus saving per person only increased 12% last year and loans only increased 4.7%, a real decline given high rates of inflation. This may be because few bazaar cooperatives innovate their product range or market to new members. Most bazaar co-operatives also operate as simple rotating credit clubs. They do not make an active credit decision, but simply lend money to each member in turn. They do not try to attract members from outside the bazaar. Many do not offer deposit accounts, but simply lend out member’s shares and the accumulated compulsory savings. Many do, however, have high costs, since they typically have staff and relatively complex operations. As a result, they are subscale, i.e. with high cost income ratios driven by high cost asset ratios. Some bazaar co-operatives have, however, transformed themselves into full credit unions – attracting members from outside of the formal bazaar, offering a range of products, taking on savings and offering larger loans to members. These societies have much stronger financial performance, since they are larger and therefore operating at scale. There is a major opportunity to increase the range of services in the less dynamic bazaar co-operatives, many of which already have staff and more professional operations. This wider product range would create a rate of growth that would allow them to reach scale and so reduce their cost income ratios.

Example 2: Shiplaw Bazaar Credit Cooperative Society background Members are mostly traders at the Shiplaw township bazaar. There are 370 members, 56 of whom are ‘microfinance’ customers, some of whom are not located in the bazaar building. The society started 10 years ago. Shares and savings Each normal member pays 48,000 in shares, although the ‘micro-finance’ customers do not pay this amount. There were 240m Kyat in shares and 258 m Kyat in 96

savings at the end of 2006 – a total of 489 m Kyat. At the end of 2005 the total was 280m Kyat – a growth of 77% in one year. Loans There are several different types of loans – ranging from 48,000 Kyat to 270,000 Kyat. Most loans are for 3 months, with a total interest of 6% (e.g. 1% interest rate per month plus 3% ‘operational cost’ set up charge). Members need to have 2% of their loan in a savings account. Loans are typically given for business development, to existing traders. Loan repayments are made daily. These repayments exceed demand for loans as loans are given to members in rotation. There have not been any cases of bad-debt. Operations The society has a staff of 7 and an office in the Bazaar. All operations are manual. The society plans to expand its lending operations with new products. If it had additional funds it could lend more, but it does not know where these funds can be sourced. The society plans to increase its micro-finance activities, which started two years ago. *Financial Societies A third type of credit co-operative – financial societies – flourished in the late 1990s and early 2000s. These societies often had only a few members and offered financial services to a large number of non-members. Since they were regulated by the Co-operative Law (rather than the Central Bank Law) they were free to set interest rates, which were typically considerably higher than commercial bank rates. As a result of the high interest rates they grew fast, but were judged a danger to the financial system by the Central Bank, which wanted to enforce a lower interest rate. These societies had their regulatory approval removed in the mid 2000s.

Future Opportunities for Growth All types of thrift and credit co-operative society have a board of Directors with 5 full-time members: Chairman, Vice Chairman, Secretary, Vice Secretary and Director. The Board of Directors has a 4 year tenure. Full member meetings typically occur once a year – but may be more often. Members are also able to borrow up on 3 times their savings and shares. Given that the average member has approx 20,000 Kyat as savings and shares, this implies an average loan of 60,000 Kyat – however, since societies cover a wide range of different income groups there is a significant variation in this amount. Emergency loans are given for 1 month, typical loans are for 4-5 months and

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

DEVELOPMENT CASE STUDY

Fig 3: Membership Development operations are completed by the Board of Directors who may or may not receive a daily re-imbursement. Agricultural Co-operative Societies provide loans for seasonal farming to whole communities. Loans of 20,000 Kyat per hectare are provided, which are re-paid in a lump sum at the end of the growing season.

Analysis of thrift and credit co-operatives in Myanmar The Methodology described in Fig 1 at section B provides a framework for the analysis of the Thrift and Credit Co-operatives. Market Profile

Fig 4: Breakdown of savings and shares in Thrift and Credit Co-operatives

sometimes loans of up to one year are available. Typically, interest rates are now 1% per month for deposits (12.7% pa) and 1.5% for loans (19.6% pa), although higher interest rates are offered for higher risk loans. Primary Societies normally lend almost all of their deposits and shares – so are not in need of an external organisation to take their excess liquidity. Given the negative real interest rates there is a great demand for loans. However, Secondary and Tertiary level Credit Unions borrow from the societies and the Co-operative Bank and on-lend to Primary Societies to support their liquidity. Some of these loans require collateral. Large societies have staff, of up to 7 people. In smaller societies, especially in Department Co-operatives,

The banking sector in Myanmar is poorly developed. There are relatively few banks and few people have bank accounts. The government has established some commercial banks, which have branches in urban areas. There are also some private banks that cater to richer people and agricultural credit co-operatives provide some seasonal credit for farmers. But it appears that the majority of the middle-class population and lower income non-farming groups do not have access to formal financial services - Myanmar is one of the last ‘un-developed banking markets’. In emergencies, the two options for the majority of the population are to turn to informal money lenders who charge from 10% per month (213% per year) to 30% per month (2,300% per year), or to use a credit cooperative. Market Attractiveness of Thrift and Credit Cooperative Societies Market attractiveness is determined by the level of competition in the market, the macro-economic

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

97

DEVELOPMENT CASE STUDY

environment, the legislative environment and public opinion of co-operatives. These elements are taken in turn. There is very little competition in the market. The few existing financial services institutions: agricultural co-operatives and formal banks do not cater to the target market of the thrift and credit co-operative societies. Thrift and credit co-operative societies face a major barrier to growth from the macro-economic environment, especially interest rates which are set well below inflation. Inflation is estimated to be approximately 30% per year, while the Central Bank of Myanmar requests credit co-operatives to maintain interest rates at close to 12% per year. This creates a negative real interest rate and co-operatives cannot easily sell savings products. Thus the thrift and credit co-operative movement in Myanmar is in a strong position in the marketplace. This is the right time to build up the capabilities of the organisations so that they can grow fast once there is increase in demand. The entrance of multinational financial service providers could change this favourable context very rapidly. Organisation effectiveness Most of the credit co-operatives in Myanmar operate as simple rotating credit clubs. Members pay for membership which entitles them to a periodic payment of 3 to 10 times their membership ‘fee’, so long as they also provide a proportion of the payment as a compulsory saving. No credit decision is made, but people wait their turn for the payment. There is little member growth, perhaps because there is little benefit to members if the society grows. Given the simplicity of the operations, many of the societies have developed surprisingly complex systems, with staff, daily collections, daily settlements processes and audited accounts. In other countries, such a simple product is often delivered by a simple voluntary organisation with no staff or formal accounting. As a result, the co-operatives have high cost to asset ratios and hence low profitability.

Unions’. Much of the work has already been done, since societies have the staff and most of the accounting processes required. They now need to develop their product range and attract more customers and volume of business. This will require external support. There is currently very little central support provided to co-operatives. None of the co-operatives interviewed during this study had received any regular support from Central Co-operative Services, syndicates or unions. All had regular contacts with the Department of Co-operatives, for quarterly audits and to provide basic introductory training, but did not receive any support on process or product development. There is little inter-lending at the moment, partially because societies lend out all of their assets. There are many opportunities to increase central support, which will require a significant change in approach from the syndicates, unions and the Central Co-operative Services. The first step is to ensure that national institutions are responsive to the issues facing member societies. Given that the priority is to transform small ‘Credit Clubs’ into ‘Credit Unions’, it is likely that the cooperatives will then need assistance to design new products, attract new members and market their services to non-members. This assistance could be given as a ‘bundled package of assistance’, delivered through a motivation and change program. Currently, few standard operational processes are being employed by the co-operatives. This is can be seen, for example, by the differences in the preparation of annual accounts between different societies. There are no standard processes for credit evaluation or customer acquisition. This lack of standardisation carries few risks at the moment, since most societies have a simple product set, but as societies develop they will need more standards to reduce operational risk and ensure the managers do not spend time ‘reinvesting the wheel’. Elsewhere, national federations have created a standard ‘model branch’ which details operational approaches, sales processes, marketing messages, audit, IT systems, etc. Culture and leadership

Some societies have developed beyond the simple product set to become full credit unions: they provide a wide range of products, make active loan decisions, have more customers. These operations need staff and more complex systems. These societies have much larger volumes of business and are more profitable. The challenge facing the movement is to convert more of the simple ‘rotating credit clubs’ into ‘Credit 98

To investigate the current culture, a set of check-box evaluation tools were used to evaluate the movement on ‘member orientation’, ‘organization flexibility’, ‘movement effectiveness’, ‘staff development ‘and ‘direction of cultural change’. Overall the movement scored low in all measures and cultural change is a major priority (see www.newthinking.org/toolkit.htm for more details of the evaluation framework).

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

DEVELOPMENT CASE STUDY

The low score on member orientation reflects the current lack of focus on member issues. Member meetings in societies only happen once per year. There are few feedback mechanisms from members to management or apex institutions. The low score on organisation flexibility indicates a lack of dynamism in the movement. Many societies are happy to remain simple and not develop – a number said that they did not want to develop new products or get new members. Moreover, decision making in cooperatives is slow. The effectiveness of the overall movement is limited by a lack of co-operation and coordination between the different levels of the movement. Until the transformation of the support structure described above is complete, it will be difficult to centralise any operations and the effectiveness of the movement as a whole will be reduced. The limited integration of the movement also impacts the staff development performance. Beyond initial basic training within by the co-operative department, there are no systems to develop the skills of staff working within the societies. While processes are simple, this should not be a problem, but once co-operatives start to develop, more staff development will be required.

Conclusions In summary, while some societies have developed more sophisticated processes and products, most societies have very simple processes and systems. They will not be able to reach their potential, or grow in a more favourable macro-economic climate, unless they reform their operations considerably. To achieve this reform, societies would benefit from increased support from an apex body, such as CCS, to define standard processes and procedures. More importantly, however, they need to achieve a ‘culture change’ to become more focused on their members and more ambitious in their goals. Impact, sustainability and projections Credit co-operatives in Myanmar are already providing useful services to their members. They are the only source of finance and, especially within the Bazaars, are supporting the development of micro-enterprises. While the co-operatives are not focusing on the poorest groups, they are certainly not the preserve of the wealthy. Some co-operatives are already providing micro-finance services. Overall, the co-operative movement has a clear positive developmental impact and, with further development, this impact is likely to increase.

The existing departmental co-operatives appear sustainable. They are financially viable on-going operations, those that use volunteers have low costs and they have simple operations. They do not face competition and are reported to have no bad-debt issues. They are likely to continue, although may well continue to decline slowly without external support, mobilisation and product development. Bazaar co-operatives are potentially more dynamic. Some have already developed their product range and are trying to expand their membership by allowing other groups to join. These societies are likely to be an example for other societies and, by operating at scale, are financially viable and so can grow. Smaller bazaar co-operatives may face financial difficulties, since they have high costs in comparison to their assets (due to having staff) and limited revenues from enforced low net interest margins. It is likely that in time the bazaar co-operative market will move from having a large number of small societies to having a smaller number of larger and more financially viable societies. Critical success factors for developing the Thrift and Credit Co-operatives The above investigation indicates that the future success of the movement will depend upon: 1. An active and dynamic leadership in the societies – with leaders focused on growth. 2. A regional / national support structure that helps societies develop and in time takes responsibility for some operations. 3. Dissemination of best practice from more successful co-operatives to other societies, including new products, processes and customer acquisition techniques. Short-term strategic priorities for thrift and credit co-operatives The above analysis indicates the major needs within the Thrift and Credit Co-operatives, which can be summarised into three themes. Development of national support This requires organisation development at the various organisation layers. The first step is to create a ‘vision’ (or a set of alternative visions) for how the movement should develop. This vision would identify priority inputs that the support agencies should provide to the movement. These priority inputs are likely to include: liquidity funding, tools to help societies plan, standard products that societies can roll-out and a newsletter that provides examples of successful societies. By identifying these priority inputs, the support structure

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

99

DEVELOPMENT CASE STUDY

will reduce its ‘business as usual’ activities and increase its focus on ‘new project areas’. Culture change in co-operatives This is a fundamental requirement for their development. Culture change can be achieved by identifying areas where the current culture needs reforming, making a clear definition of the cultural change required and identifying specific actions that will achieve the change. Responsibility for this culture change sits with CCS, the Department of Co-operatives and the societies themselves. CCS can create tools and processes that generate a change in culture. The Department of Co-operatives can ensure that its’ staff focus on effective regulation. Some societies have already expanded their customer base and product set, allowing them to grow and achieve economies of scale. A large number of societies have not, however, made this transition – currently only offering very simple products and limiting their membership base. These less active societies need to scale up their operations. While responsibility for this change to operations ultimately rests with the local leadership of the societies, the central support agencies can help. For example, they can run ‘business development’ programs for high potential societies, helping them implement a range of reforms. They can inform societies of the opportunities to implement new products, especially savings products. They can help disseminate the lessons from the more successful societies to others.

Fig 5: Short-term priorities for development of thrift and credit co-operatives in Myanmar

Longer-term development opportunities The immediate priority is to grow the thrift and credit co-operative societies so they are providing a broader range of services and serving more customers. However, once this transformation is achieved, the societies will soon find that they need to reform their processes to handle the increased volumes of transactions. At this stage, societies should consider implementing IT systems to automate transactions and accounting processes, centralising some processing functions, such as credit document preparation or regulation submissions and creating support teams to help societies improve their efficiency. Since most

Area

Cultural change required

Example actions to create culture change

1.Member orientation

Society leaders focused on member needs

CCS to request each Board of Directors to create a simple (one page) plan of actions for the next year to address member needs

1.1Service orientation

Societies to have more frequent member meetings, with more time to discuss member issues Larger societies to create an anonymous suggestion box 2. Organization flexibility 2.1 Motivation for change

2. Organization flexibility 2.2 Clarity of Direction

Society leaders more motivated to develop their societies

CCS to create guidelines for remuneration to Board of Directors members, based on membership and / or profit growth

Future direction for societies planned and understood by whole movement

Dept of Co-ops / CCS to create a strategy paper that describes the ‘society of the future’, covering: products offered, society size, CCS areas of support

CCS to promote new ideas and ‘Best Practice’ to societies, perhaps through a newsletter

CCS to study likely future needs (e.g. IT, new products, insurance, etc.) 4.Staff development 4.1Staff recognition

Motivation of staff in Societies increased

CCS to create a simple staff evaluation form, to be completed every 6 months. Society managers to fill-out forms Society leaders to give staff targets for new member mobilisation, increase in deposits, etc.

Table 2: Initial description of culture change priorities 100

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

DEVELOPMENT CASE STUDY

societies are located in urban areas, with good communications, efficiency improvement programs should be relatively simple to implement. Central support agencies should lead this efficiency improvement program. Once a society model is well developed, the model may be applied to other areas. Most societies are located in urban areas at the moment, yet there is likely to be a major demand for non-agricultural credit in rural areas. Additionally, there is likely to be significant demand for more products, such as insurance, longer-term loans, or leasing, which could be sold through the existing co-operative societies, with the societies acting as a sales agent. It should be possible to start to roll-out these services in two to three years, once the institutional basis of the existing co-operatives is strengthened.

HIGHER DIPLOMA/MSc in CO-OPERATIVE ORGANISATION, FOOD MARKETING AND RURAL DEVELOPMENT The Department of Food Business and Development, in association with the Centre for Cooperative Studies at University College Cork offers a Higher Diploma/MSc in Co-operative Organisation, Food Marketing and Rural Development to graduates to equip them with the organisational and marketing skills they will need to make innovative contributions to the development of local economies and community-based food and small businesses in Ireland and overseas. If you are interested in using your degree while working at the cutting edge of community, organisational and business development then this may be the course for you. For further information please contact one of the following: Dr. Michael Ward or Olive McCarthy, Dept of Food Business and Development, University College Cork Tel: 021 4902570 Email: [email protected] or Mary Murphy, Postgraduate Admissions, University College Cork Tel: 021 4902876/4902645 Email: [email protected]

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

101

BOOK REVIEWS

Vertical Markets and Co-operative Hierarchies. The Roles of Cooperatives in the Agri-Food Industry Kostas Karantininis and Jerker Nilsson, Editors, (2007) Springer, The Netherlands. ISBN - 10-4020-4072-5 (HB) ISBN - 10-4020-5543-0 (e-book)

This scholarly book is the work of twenty-three internationally recognised academics providing 16 papers variously on aspects of agricultural co-operative economic and commercial performance and business organisation. Written primarily for the specialist agricultural economist and student of agricultural economics and business it is dedicated to the memory of one of the great intellectual forces of Greek and indeed world agricultural economics the late Prof. Konstantinos Oustapssidis formerly of the Aristotle University of Thessaloniki, Greece. For those interested in the development of ideas in the discipline of agricultural economics this book contains a select bibliography of some of the late Prof Oustapassidis seminal works.

The range and scholarship of this work make it a must for any university library with departments specializing in agricultural economics. There is far too much depth of content to do more than mention the range of topics here. The authors discuss problems of structure, networking, innovation, performance, governance, leadership and consumer attitudes and there are in addition some interesting materials on the dairy sector in Europe and demutualisation in the United States. I will discuss below some of the ideas by one of the contributing authors Anastassios Gentzoganis, chapter 9 “Regulation, Governance and Capital Structure in Co-operatives”. I select this chapter because, its introduction at least, links to the concern of the other book I have reviewed for this issue - that of lack of capitalisation in co-operatives.

Co-operative Capital. A new approach to investment in co-operatives Jim Brown, Co-operative Action, Manchester, UK. ISBN 0-9548652-0-0 (PB)

This book is something of a collective effort. Jim Browns acknowledgements read rather as a who’s who of the UK Industrial Common Ownership Movement. The book has chapters by Andrew Bibby, Chapter 3 on current investment practises and Chapter 4 on the ethical investor and Charlie Cattell wrote Chapter 7 “An equity Model for Co-operatives”. The book also used research by Dr Rebecca Harding and Jamie Hartzel and a number of others are named as making a contribution to the project as a whole. This work is a book for practitioners rather than academics. Not that it is not of considerable interest to academics as a source of evidence of just how far the Industrial Common Ownership Movement have travelled from its original fixation on collectivism and antipathy towards any form of co-operative ownership / management model that deviated from direct collective worker control. In fact the book in its advocacy of external capital investment to assist the development of worker co-operatives is developing a model of external investment in worker co-operatives that was first 102

established over a century ago in England by Thomas Blandford. Blandfords’ Co-operative Productive Federation (CPF) arose out of a reaction to the consumer co-operative ideologues determination to eradicate profit sharing with the workers from the by then firmly “consumer co-operative” movement. I do not agree with the books opening premise that traditionally co-operatives have preferred debt to equity as the CPF example illustrates this was not the case. This is rather the perspective of a certain cul-desac of micro co-operatives that came into existence as part of the ICOM initiative from the 1960s onwards. In the beginning, contrary to both Consumer Cooperation and CPF perspectives, the British Cooperative Movement took a much more macro labour market based perspective. Closely allied to the early trade unions, many of which had the establishment of co-operative ownership in their constitutional aims, the approach was to mobilise not investment income but discretionary wage income. (1) By raising small amounts of gifted money or small savings the

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

BOOK REVIEWS

movement hoped to establish economic organisations under popular ownership and control. Giving away capital as consumer dividend or as worker profit sharing went against this earlier principle, established by William Pare at a conference at which Robert Owen took the chair, that none of the surplus should be divided. Aside from questions of co-operative history, I do congratulate Jim Brown and his co-authors for producing an ethical and practical alternative to the current market for capital. The practical proposals and analysis deserve serious attention and discussion. I just hope that the beleaguered Trade Union and Consumer Co-operative sectors alongside the miniscule Credit Union and lager but diminished Building Societies can be persuaded to enter into the dialogue. But why I wonder do we want to go cap in hand to the State – not an option surely co-operative movements that wish to retain their autonomy should relish? Why not ask the trade unions to request of their members a voluntary co-operative job-creation fund donation of 5p per week? Not unlike the political levy? If only a million TU members agreed in a matter of the first two years a bigger sum than the £20 million (p142) the books authors aspires to would have been raised - one that ICOF experience demonstrates could be recycled many times and would be continuously building via trade union collections so that the size and scale of the employment opportunities could themselves grow, possibly permitting the purchase of innovative patents for co-operative ownership. (2)

Regulation, Governance and Capital Structure In the Karantininis and Nilsson edited books’, Chapter 9. “Regulation, Governance and Capital Structure” Anastassios Gentzoglanis, from the Centre for the Study of Regulatory Economics and Finance University of Sherbrook in Quebec, Canada takes a stand which could be seen as an academic endorsement for the aim in Jim Browns book to establish a market for cooperative capital. Gentzoganis identifies the lack of tradability (p151) of ownership rights as a significant factor in explaining the “underperformance” of capital in the co-operative context. Even accepting, as Gentzoganis does, the sub-optimisation of capital in cooperatives as correct we must say that the proposition itself tells us more about how the co-operative purpose is misunderstood than it does about the economic efficiency of the co-operative business model. Cooperatives are of course primarily the result of members’ lack of capital. We first of all need to

recognise this or we miss the point of co-operatives as alternatives to the capital based business model. Membership of co-operatives is not determined on grounds of a “rational choice” between the relative efficiency of capital employed in alternative contexts but a choice made out of the necessity arising from the deficiency of capital. It is not that co-operative members are deprived of more profitable opportunities by the co-operative structure; on the contrary it’s because of the co-operative structure that they have profitable opportunities at all. (p152) The second fundamental rational for co-operatives is the delivery of services at quality levels that are not available in any alternative format at an equivalent standard. I believe that co-operative shortage of capital is not an economic question at all but rather a political one of raising the conscious and then subsequently mobilising small sums of discretionary income from the people whose existence in terms of family farms, local employment and through the lack of other services are threatened by the capital dominated market economy – not market economy per say. However, let me state that this issue driving Jim Browns book is not central to the analysis of Gentzoganis’ chapter which rather seeks to explain the alleged sub-optimisation in terms of co-operative governance systems. Here I agree the relative lack of external tools (capital market regulation through the share price) to control management in co-operative as opposed to capital based firms is a real problem particularly as co-operative managers are often in positions vis a vis their boards of relative intellectual/educational as well as informational advantage. From this standpoint Gentzoglanis examines four models of co-operative governance (the simple finance model; the stewardship model; the stakeholder model, and the political model) in a clear and to the non specialist accessible language. I do recommend this chapter and the whole book to readers to examine as an intelligent contribution to the debate on how to overcome problems of measuring and evaluating co-operative performance, strategy and capital formation. Towards the end of Gentzoganis’ analysis the author gives some acknowledgement to the different purposes of co-operatives to capital based business. He concludes that co-operatives operating with powerful managers, by pursuing their own interests, rely on higher equity to asset ratios than those of non – powerful managers (due to members’ reluctance to take the risk with their personal equity – see pp163164). Gentzoganis may also be on to something in his raising the possibility unification of co-operative

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

103

BOOK REVIEWS

governance models. What his regulatory approach lacks is any consideration of management methodologies as being themselves important regulatory mechanisms. (3)

Notes 1. A mixture of profit sharing and the insistence on returns by the outside investors (often consumer co-operatives) undoubtedly restricted the opportunity for growth of Bland fords’ CPF Cooperatives. J.F. Bray and William King both saw small savings as the way to liberate labour. For King retailing was merely a low capital requirement strategy for accumulation not distribution of capital. 2. Davis, P. (2000) Chapter 7 “Co-operative Strategies for Trade Unions” in Labour and the Family, Harokopia University, Athens, Greece and Leicester University, England. “Co-operative Development as a Trade Union Strategy” (1988) in Journal of Interdisciplinary Economics, University of Exeter, Spring, 1988. 3. Davis, P. (1999) Managing the Co-operative Difference, ILO Co-operative Branch, Geneva.

The Editor

104

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

ADVERTISEMENT

National Association of Co-operative Officials (NACO) NACO is a Management Association and an Independent Trades Union, representing managerial and professional grades within the United Kingdom Co-operative Movement. NACO has sole representational rights for managerial and professional staff in all UK consumer co-operative societies and within the Co-operative Insurance Society Limited. The range of services available to members encompasses collective bargaining on pay rates and terms and conditions of employment, professional advice, legal advice and individual representation – always delivered by a full-time professional official of the Association. The Association also provides ancillary services including discounted products, educational seminars and residential conferences. NACO has grown and developed to be a major and respected professional body representing the vast majority of managers and professionals in consumer co-operatives. The Association seeks to work in partnership with co-operative societies and the excellent relationships developed help us support members individually and collectively. The Association is now looking to expand upon its traditional base, and develop relationships with members in housing co-operatives, farming co-operatives and credit unions to name but a few.

Affiliate membership opportunity NACO also wishes to cross traditional barriers and share practices and experiences with similar minded bodies with links to the worldwide co-operative movement. In this respect, moves are in place to create an affiliate membership to allow fraternal organisations to develop links with NACO in the United Kingdom. Any parties interested in developing such a relationship should contact Lindsay Ewing, General Secretary or Neil Buist, Assistant General Secretary. Contact details: Tel - 0161 494 8693 Fax – 0161 366 6800 E mail [email protected] or [email protected]

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

105

ADVERTISEMENT

SCHOOL OF MANAGEMENT Unit for Membership Based Organizations Working for Co-operative Management and Organizational Development for Agricultural, Consumer, Worker, Credit, and Service Co-operatives.

A pioneering approach for today’s pioneers Programmes and other Services: • Consultancy and Research Services • Individually supervised M.Phil. and Ph.D. programmes focusing upon co-operative and other membership based organizations • Provision of management and organizational development seminars for membership based organizations • Collaborating in partnership with membership based organizations in the development and delivery of training, development and research programmes

For applications or further enquiries please contact: Dr Peter Davis, Chartered FCIPD, AHEA, Director Unit for Membership Based Organizations, School of Management University of Leicester, Ken Edwards Building, University Road Leicester, LE1 7RH UK Web-site www.le.ac.uk/ulmc/umbo Tel: +44 (0) 116 252 5517 E-mail: [email protected]

106

Fax: +44 (0) 116 252 5515

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

GLOBAL NETWORK

Co-operative learning needs a global network for a global economy For teaching, consultancy and research services and facilities in co-operative management and organizational development in your region contact one of the following regional learning centres which together form a global network committed to co-operative management and organizational development networked with the University of Leicester Unit for Membership Based Organizations in the School of Management.

AGRICULTURAL UNIVERSITY OF ATHENS DEPARTMENT OF AGRICULTURAL ECONOMICS 75, IERA ODOS – VOTANIKOS 118 55, ATHENS – GREECE TEL: (301) 5294752 – FAX (301) 5294764

Cipriani College of Labour and Co-operative Studies Churchill-Roosevelt Highway, Valsayn Trinidad & Tobago, West Indies

International Centre for Co-operative Studies and the Negev Institute for Strategies of Peace and Development Paradise Negev, Beersheva, 84894, Israel

Hotel Agro Panorama Conference Centre Ltd. H-1121 Budapest, XII. Normafa út 54 Postal address: H-1525 Budapest, 114. Pf. 204, Hungary Tel: 375-6891 • Fax: 375-6164 Email: [email protected]

MAKTAB KERJASAMA MALAYSIA (Co-operative College of Malaysia) 103, Jalan Templer, Peti Surat 60, 46700 Petaling Jaya, Selangor D.E. Malaysia Tel: 03-757 4911 : Fax: 03-757 0434 : email: [email protected]

510 Thomson Road #12-02, SLF Building, Singapore 298135 || Tel: 259 0077 || Fax: 259 9577

MOSHI UNIVERSITY COLLEGE OF CO-OPERATIVE AND BUSINESS STUDIES

P O BOX 474 • SOKOINE ROAD • MOSHI • TANZANIA Tel: (055)-51833 • Fax: 255-055-50806 International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

107

ADVERTISEMENT

Authors with ideas and analyses, case studies, research monographs with a focus related to co-operative management and the movement, the social economy and sustainable development, or with outside perspectives that could be of strategic value to both co-operatives and the social economy, are welcome to submit proposals.

New Harmony Press is a worker co-operative publisher New Harmony Press 50 Tower Street Leicester LE1 6WT www.newharmonypress.com Home page, Contact

108

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

NOTES FOR CONTRIBUTORS

Notes for Contributors The International Journal of Co-operative Management welcomes articles on themes related to the journal’s mission.

Length of Papers

Graphics

Papers should normally be between 3,000 and 4,000 words. Editorial staff may occasionally specify a proposed length for review articles.

Tables should avoid complexity, and photographic material should not be submitted unless agreed by the editors.

Executive reports and reports on research in progress should be between 1,000 and 2,000 words.

References

Book reviews and dissertation extracts should be approximately 500 words. Peer review All articles submitted will be subject to peer review. Originality All articles submitted must contain a statement that the article has not been submitted to another outlet and will not be so submitted while under consideration by the International Journal of Co-operative Management. Authors must provide a warranty and indemnity that no copyright has been infringed in the article. All authors must give consent to publish.

References should be numbered in the text and should include author(s), date, title of publication, publisher, place of publication. Articles and quotations should include the page references. Endnotes and references References should be listed at the end of the article. Footnotes should not be used. Instead, endnotes should be placed immediately before the References. Book titles and Journal titles in italics. Proofs Proofs will be sent to authors and must be returned promptly. Major changes will only be accepted before the proof stage.

Content and format

Copyright

The editors reserve the right to make minor adjustments and will seek to ensure that the general meaning is not changed thereby. Articles intended for publication should be submitted by e-mail, followed by a hard copy printed on one side of paper (preferably A4 size) in double line spacing, with 3cm margins. A copy of the article may be submitted on 31/2 inch diskette if no e-mail facility is available. All pages must be produced in Word or Adobe format. All forms of the word co-operative, co-operation, co-op etc should be spelt with a hyphen.

Copyright of all articles published in the journal shall be owned by the publishers to ensure proper use of copying.

E-mail to: [email protected] Headings Sub-headings are encouraged to break up the text and to improve readability. Headings should have the initial letter of first word capitalized. Subsequent words all lower case, bold with column-width underline. Sub-sub headings Should be in bold, lower case, with no underline. The first word should have an initial capital letter.

Future topics • • • • • • • • • • • • • •

Managing co-operatives in transition Marketing the co-operative difference Logistics: can co-operatives do better? Learning community versus entrepreneurship. The search for the co-operative paradigm for innovation Human Resource Management: are we making the most of our people? Exploring joint ventures – leveraging co-operation Procurement for profits with principles Co-operative accounting Raising finance for co-operatives Models of co-operative management Culture and Co-operatives Co-operative retailing in the UK Risk Management

International Journal of Co-operative Management • Volume 3 • Number 2 • November 2007

109

Sponsorship of the International Journal of Co-operative Management Individuals, associations and organizations with special interest in the purposes of this journal are invited to sponsor its continued development through making a donation of £500 or more to the journal’s operating funds or to become a Foundation Sponsor with a donation of £2000 or more. Cheques should be made payable to the New Harmony Press Ltd and addressed to the Editor.

List of sponsors OrganizationS Co-op Atlantic, Canada

(Foundation sponsor)

Desjardins, Canada

(Foundation sponsor)

NTUC Income, Singapore

(Foundation sponsor)

INDIVIDUAL Prof. Thoby Mutis, Indonesia (Foundation sponsor)

Cover & spine

13/12/07

13:28

Page 1

ISSN 1741–4814 THE

INTERNATIONAL JOURNAL

OF

THE

CO-OPERATIVE MANAGEMENT

INTERNATIONAL JOURNAL

VOLUME 3

NUMBER 2

NOVEMBER 2007

OF

CO -OPERATIVE MANAGEMENT 3

THIS ISSUE:

N O V E M B E R 2007

50 Tower Street • Leicester • LE1 6WT • UK

T HE C O - OPERATIVE D IFFERENCE M ORAL AND E THICAL P ERSPECTIVES ON L EADERSHIP M ANAGING M EMBER H ETEROGENEITY IN A GRICULTURAL C O - OPERATIVES D YNAMICS AND T ENSIONS IN C O - OPERATIVE G OVERNANCE S OCIAL R ESPONSIBILITY IN C O - OPERATIVES C REDIT AND C O - OPERATIVE D EVELOPMENT IN R URAL I RAQ . A HISTORICAL C REDIT U NION S UPERVISION C O - OPERATIVE B ANKING IN I NDIA E XECUTIVE O PINION , F IELD R ESEARCH AND B OOK R EVIEWS

NUMBER 2

Developing themes: Strategy, competitive advantage, co-operation between co-operatives, managing change, IT, networking, managing key stakeholder relationships, globalisation, governance, developing co-operative managers, managing and developing people, managing media, marketing, finance, logistics, quality, values.

VOLUME

Future Issues: Special guest paper Other refereed papers Executive interviews and reports Best practise Case studies Research abstracts Book reviews Law reports

P

U

B

L

I

S

H

E

D

B

Y

I

N

A

S S O C I A T I O N

ANALYSIS

w

I T H